1046
by Jedidiah
The presented indicator is prepared on the basis of well known indicator Bollinger Bands. In short, Bollinger Bands consists of two lines that are situated above and below of moving average plotted of a certain number of standard deviations away from it. In case of high volatility lines become wider, during less volatile periods they become narrower. So, these bands show borders of possible price movement.
Observation of the Bollinger’s behavior has revealed another interesting pattern. The widening of the channel indicates the formation of bullish or bearish type of the price movement. In my opinion it is not possible to find the starting point of such movement, because as a rule it becomes clear at the end. However, this moment may be adopted to find the point of extinction of the impulse. Figure 1 shows that the narrowing of the Bollinger Bands channel is correlated with the moment of the break in struggle between bears and bulls.
For trader’s convenience, it is prepared indicator, which calculates difference between upper and lower lines of Bollinger Bands, which is plotted in a separate window as a histogram. Because of the lack the description in the literature the indicator with a similar algorithm, for the purpose of this publication I decided to call it BoDi (Bollinger's Difference) (Fig. 1).
Indicator is calculated on the following formulas:
1. Bollinger Bands:
where:
D - number of standard deviations,
y - price for i bar,
n - number of periods used for calculations,
UpperBB and LoweBB - upper and lower lines of Bollinger Bands.
2. BoDi:
BoDi = (UpperBB - LowerBB) * 1000
where:
1000 - coefficient for better visualization.
This indicator better to use on currencies with impulse behavior. Figure 1 shows that when price moves rapidly bands of Bollinger become wider and histogram of BoDi becomes green. In turn, when price movement slows the difference between Bollinger bands become narrower that is visible on BoDi’s histogram, which is colored to red. This moment can be treated as a signal to close position or partial close or to move stop-loss to the open price level.
Indicator BoDi I can recommend as an additional tool to find exit points in trend and breakout type of trading (Fig. 2).
For those who uses expert advisers I may propose the following algorithm for finding point to close position:
1. BoDi [1] < BoDi [2],
2. BoDi [2] > BoDi [3], ... BoDi [n-1] > BoDi [n], (n = 7 - 9),
3. BoDi [2] > BoDi [n] * k, (k = 1.5 - 2)
where:
[1] - index of the bar relative to the current (zero) bar,
n - number of the last bar used in calculation,
k - ratio of the second bar [2] to the last bar [n].
I recommend to calculate BoDi on the basis of exponential moving average (EMA), period 20 and typical price.
Be patient therefore, brethren, until the coming of the Lord. Behold, the husbandman waiteth for the precious fruit of the earth: patiently bearing till he receive the early and latter rain.
Behold, we account them blessed who have endured. You have heard of the patience of Job, and you have seen the end of the Lord, that the Lord is merciful and compassionate.
