March 25, 2017: New comments S&P500
Want to know more about "Capturing Profit with Technical Analysis"?
Twice semi-finalist "Favorite Article" in the S&C 2015 Readers' Choice Award. Thank You!
AXIOM business books awards, bronze medal for my book! Thank You!
The BBS Band Break System is a trend following system. It is based on the idea that trading stocks, you need a minimum reversal amount before you can assume a change of trend. For a BBS buying signal this means the upper side of the band needs to be broken by the closing price.
Once in a trade you need to leave sufficient room for short term price reactions. You will stay in the trade as long as price remains above the lower band of BBS. That will allow sufficient room for short term reactions. Finally the trade is closed when the lower band of BBS is broken by a closing price.
In a trend following system in general, trading long is profitable as long as price makes medium to longer term up moves. Trading all the time downward corrections is not profitable. For that reason we will only go for short trades during longer time down trends in the market. To enter a short trade we need a signal from BBS with a closing price below the lower BBS band AND the closing price must be below the 165 days simple moving average. Only that way short trades will contribute to a higher profit.
For trading the BBS system, we use the BBS chart template. BBS can be used in any time frame.
First we just create a candle chart and put the S10_BandBreak indicator over the price bars, of course using the same scale as the price bars. The green line is the upper side of the trading band and the orange line is the lower side of the trading band.
The S10_bandbreak indicator uses 3 parameters. A data average, a look back period and a multiplication factor. The defaults used are respectively: 13, 8 and 0.9.
Next we add 3 averages: a 50 (blue), 100 (red dashed) and 165 (red) simple moving average.
Actually this is all you need for trading the basic BBS system. However, no system is perfect, so we will try to avoid some of the losing trades. And for that we will add a couple of extra indicators in the next page that will help you to make decisions to override the BBS signal.