Chart 1: KLCI from 30/04/2009 to6/08/2009.
The expansion and contraction of the Bollinger Bands Width:
Unlike other indicators which indicate signals by the crossing between lines, the Bollinger Bands Width indicates the changes of price fluctuation by its band width, expanding and contracting.When price is moving sideways, its volatility begins to reduce, and therefore, based on the calculation of the Bollinger Bands, the band width will contract, and when it shows on the chart, investors would have a clear visual effect of the contraction, thus signaling a consolidation of the price.
Other other hand, when price fluctuation increases, the Bollinger Bands Width will expands; when shown on the chart, the expansion will indicate the end of the consolidation, thus a beginning of a new movement. However, the direction of the new movement could be upside biased or downside biased. Therefore, investors have to judge the new direction based on the position of the price above or below the Bollinger Middle Band. If price should stay above the Bollinger Middle Band when the Bollinger Bands Width expands, it is a bullish biased movement. When price should stay below the Bollinger Middle Band as the Bollinger Bands Width expands, it would be a bearish biased movement.
Chart 2: KNM – 7164, chart from 11/03/2009 to 23/06/2009.
As shown on chart 2, arrow A, B, C, and D are the signal of the Bollinger Bands Width expansion after the contraction. With price above the Bollinger Middle Band when the Bollinger Bands Width expands, A, B, C, and D are signal suggesting a bullish biased movement, thus the signal of resuming the uptrend. Investors can view these signals as a buy signal. Contrary, as indicated by E, the Bollinger Bands Width re-expanded after its contraction, but the price is below the Bollinger Middle Band, thus suggesting a bearish biased movement, this is a sell signal.
Although A, B, C, and D are all buy signals, investors who bought a D should have a different trading plan than investors who bought a A, B, or C. For investors who bought at D, they should use the Bollinger Middle Band for the immediate cut-loss point, as this will ensure a low trading risk.
As for investors who had bought at A, he or she could even top up his or her position at B, C, and D, and he or she may not use the Bollinger Middle Band as the cut-loss point for now they are having a uptrend position. Therefore, they should apply the 14, 21, 31 EMA as the dynamic support for maximize their uptrend potential or they could use and uptrend line as an alternative. However, for topping up, it is generally safer to top the same amount of value as the first entry.
Combination of the Bollinger Bands and EMA:
As the KLCI Bollinger Bands Width contracts, the KLCI is consolidating while preparing for a new movement. Many individual counters are having similar consolidation signals while also preparing for their new movement. Therefore, investors should pay close attention to these counters in which their Bollinger Bands Width is contracting. When the Bollinger Bands Width should re-expand, with price above the Bollinger Middle Band, and preferably with strongly, it would be a buy signal.
If it is the first entry (for investors who has not bought the same stock at a lower price earlier), then the Bollinger Middle Band shall be the first cut-loss point. This is to ensure if there is a sudden reversal, investors would cut-loss immediately without suffering huge loss. In other words, a valid bullish Bollinger Bands signal should have price staying above the Bollinger Middle Band, and price should not break below the Bollinger Middle Band in the near-term (in 2 or 3 days). (Study Chart 3 and Chart 4)
Chart 3: LBS – 5789, chart from 19/05/2009 to 06/08/2009.
Chart 4: Kinstel – 5060, chart from 19/05/2009 to 06/08/2009.
As indicated by A, on Chart 3 and chart 4, the Bollinger Bands Width re-expanded after being contracted, with price above the Bollinger Middle Band. Therefore, it is a signal suggesting a continuation of the rally, and the Bollinger Middle Band shall serve as the immediate cut-loss point.
Later, if price should continue to rally, and if situations allow (for example the improvement of broad markets, positive news and high volume etc), investors could apply the EMA as dynamic support as well as the reference for trailing stop, to avoid taking profit too early, and to maximize the uptrend potential while at the same time reducing trading risk.
Counters with Bollinger Bands currently contracting:
Chart 5: Axiata – 6888, Chart from 19/05/2009 to 6/08/2009.
Next Resistance: RM 3.12
Chart 6: Tebrau – 1589, chart from 19/05/2009 to 6/08/2009.
Current Resistance: RM 0.845
Next Resistance: RM 1.00
Chart 7: Huaan – 2739, from 19/05/2009 to 06/08/2009.
Next Resistance: RM 0.59
The above chart 5, 6, and 7 are counters with the contraction of the Bollinger Bands Width, as they are preparing for a new movement. However, investors should not buy until the Bollinger Bands Width expands, as this is a basic rule of investing.
Conclusion:
For every healthy uptrend, there must be consolidations and corrections, and every time the consolidation should end and resume its uptrend, it is a right time to buy. Properly applying Bollinger Bands Width would help investors to catch these signals as entry or even top up positions. For first entry, the Bollinger Middle Band could serve as the first cut-loss point. If price should continue to rally, investor should change to the 14, 21, 31 EMA as trailing stop to avoid taking profit too early while maximizing the uptrend potential.
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Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/
