This where the volatility-based support trade setup comes into play, taking advantage of this price phenomenon. These are the parameters:
- Stock must be above $50 or higher.
- The stock’s 20-day volume average must be at least 250,000 shares traded daily.
- The stock must be trading above its 200-day simple moving average.
- Set Bollinger bands at the 20,2 setting.
- Set the %b indicator at the 5,1 setting.
Enter a long position when:
- Price is trading above the mid-line of the Bollinger band and the %b indicator has a reading below -0.10; enter the following day if price trades above the intraday high.
- Price is trading above the Bollinger band’s mid-line then trades below it while the %b reads -0.10 for two consecutive days; enter a long position as price trades above the previous intraday high.
Your exit is when the %b indicator closes above the 1.0 level. Alternatively, you can have an adjustable stop just under the Bollinger band’s mid-line moving average.
“Support trading scenarios for ALXN” and “ALXN walks the band #2” (below) present two examples of applying this methodology to Alexion Pharmaceuticals (ALXN).