SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Powerful Channel Signal – Combining Bollinger and T-line


Technicians tend to focus on single indicators, such as Bollinger Bands or the t-line. These are used to attempt to perfect a timing system. Individually, each signal has merit. Combined, the reversal signal is exceptionally strong.

To review: Bollinger Bands has three averages. The middle band is a 20-period simple moving average. The upper band and lower band are the second and third parts. Each are two standard deviations away from the middle band. This is a visual summary of historical volatility. Price generally is not likely to trade above the upper band or below the lower band for very long. When price does move outside of these ranges, it retreats back into range very quickly. So BB is like a “probability matrix” for timing entry and exit.


The T-line is an 8-day exponential moving average of price that yields surprisingly reliable signals for changes in price direction. The rule is that when price is above the t-line, it remains bullish until it crosses below and closes for at least two sessions. This sets up a bearish reversal. When price is below the t-line, the prevailing bearish trend continues until price crosses above and closes above for at least two consecutive sessions.


Taken apart, BB and the t-line are powerful on their own. However, when used in combination, you set up a very powerful dynamic trading range, making it easy to spot when a trend ends. As price advance, the BB upper band represents resistance and the t-line is support. When prices are moving down, the t-line is resistance and the BB lower band is support.


The chart for Cummins (CMI) shows the reversal signals this combination highlights.

 

image.png

 

The combined signal sets up the narrow channel based on whether price trend is bullish or bearish. In a bullish trend, the upper Bollinger Band is rising resistance and the t-line (red on the chart) is rising support. The bullish trend continues until price crosses below the t-line and closes there for two consecutive sessions.


In a bearish trend, the t-line represents declining resistance and the lower Bollinger Band is declining support. The bearish trend continues until price crosses above the t-line and closes above for two consecutive sessions.


The CMI chart shows how this works. In May, price had been declining down to as low as $140 per share. But at mid-month, price crossed above the t-line (the red line), demonstrating that the downtrend, for the moment at least, was ending.


At the beginning of July, a further decline ended when price again moved across the t-line and marked the beginning of a gradual advance.


The combination of Bollinger Bands and t-line is so reliable that it can be used effectively in two ways. First, it distinguishes between retracement (not moving across the t-line) and reversal. Second, actual crossover is the signal point for leaving a current trade and taking profits, or for entering a new trend based on the newly revised price direction.


This solves the most disturbing aspect of short-term options trading. When do you enter and exit a trade? Even with the lack of clear reversal signals, the combined use of BB and the t-line is a powerful and reliable system to improve timing.

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Cyclical versus Historical Volatility

    The interest in volatility for options trading is logical and understandable. However, the nature of volatility in not universally understood or agreed upon. In fact, it is more complex than most people believe. Options traders think of volatility coming in two forms, historical and implied.

    By Michael C. Thomsett,

    • 0 comments
    • 103 views
  • Pros and Cons of Paper Trading

    My first recommendation to all new SteadyOptions members is to start with paper trading, then start small and increase your allocation as you gain more experience and confidence. Over the years, we had a lot of discussions related to the benefits of paper trading, and this article will discuss some of the pros and cons.

    By Kim,

    • 0 comments
    • 154 views
  • Does “Managing Winners” Add Value to Short Strangles?

    Some option educators suggest short strangles have historically benefited from actively managed exit strategies. A widely popularized approach is to enter S&P 500 strangles at 45 DTE and exit at 50% of the credit received or a 21 DTE time stop, whichever occurs first.

    By Jesse,

    • 2 comments
    • 315 views
  • Fat Tails and Option Returns

    When it comes to calculating likely returns from option activity, traders contend with a variety of variations. Returns may be skewed (with declines in value more likely than increases), or unstable in many forms. Or the outcome might reveal itself in the form of a fat tail.

    By Michael C. Thomsett,

    • 0 comments
    • 214 views
  • What To Do In A low Yield Environment

    Investors over the world are struggling with yield in their portfolios.  Government investments are at historically low levels, with thirty-year treasuries basically declining every year for almost thirty years straight:

    By cwelsh,

    • 0 comments
    • 259 views
  • Option Terminology – Avoiding Confusion

    Options traders may easily fall into the habit of expressing ideas inaccurately. This might seem like a minor point, but in fact. It matters a great deal. Confusing and misleading language may lead to incorrect trade entry, and for those novices following more experienced traders, the use of proper terms is the whole story.

    By Michael C. Thomsett,

    • 0 comments
    • 431 views
  • Option Volatility and the Underlying

    Too often, traders may  make the mistake of associating option volatility with behavior of the underlying issue. However, if you employ a volatility assumption to model how an option is likely to change, remember that pricing models are theoretical. It is only useful for estimating the option risks. It does not indicate how underlying price will move.

    By Michael C. Thomsett,

    • 0 comments
    • 365 views
  • Before You Startup Your Own Investment Company, Read This!

    Often when we have had some success on the market, investors minds' begin to consider turning their solitary pursuit into a fully-fledged business. One that does not only line their own pockets but can help make some serious money for our client as well. 

    By Kim,

    • 0 comments
    • 664 views
  • Measuring “The Market”

    When you hear what “the market” did today, what do you think of? Most of us will think of one or more popular US stock indexes like the Dow Jones, Nasdaq, or S&P 500. But how well do these indices actually represent the total stock market? Dimensional Fund Advisors has created an excellent chart to help us answer this question.

    By Jesse,

    • 0 comments
    • 390 views
  • Managing Volatility Spreads

    Although traders often are attracted to hedged combinations (including spreads), some of the features are misunderstood. The spread may be viewed to manage risk, when in fact selection of an appropriate strategy may provide more potential when picked based on volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 541 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido