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

  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 260 views
  • ETF Vs. Stock: Note Down the Vital Points

    Today’s small investment can fulfill your dream of high living tomorrow. But investing blindly can make it reverse. We all want to get a high return on our investment. Stocks or ETFs can be the best option for you in such cases. The investment in stocks or ETFs is not very different except few noticeable points.

    By Kim,

    • 0 comments
    • 292 views
  • Considering Trading? Here Are Some Trading Options You Need To Know

    Whether you are considering dabbling in day trading or looking for a longer-term investment if you want to start trading it will serve you well to carry out a little due diligence in advance. There are a number of markets that you could use and understanding how each one works and what they are all about is key.

    By Kim,

    • 0 comments
    • 5,878 views
  • Why Should You Paper Trade Options

    In my previous article I shared some thoughts why I believe traders should start with paper trading before committing real capital. Not everyone would agree, but today I would like to share another article by a trader I respect very much. The original article was published here

    By Kim,

    • 0 comments
    • 295 views
  • Is Long Call Better than Bull Credit Put Spread?

    The trigger to this article was a question posted on the forum: "why we should use bull credit put spread when you can just long call they both have limited loss both in long call you have unlimited profit why limited it with bull put spread?" You can read the discussion here.

    By Kim,

    • 0 comments
    • 446 views
  • Strike Selection: A 'Sweet Spot' for Option Sellers?

    The words above are powerful because they're approach-agnostic. It doesn't matter if you're an old-school pit trader who swigs grit instead of coffee before the opening bell, or a Gen Y technocrat who codes trend-detection algorithms. All traders live and die by The Four Words. If you consistently buy low and sell high, then you will be profitable.

    By Kim,

    • 0 comments
    • 1,559 views
  • Post-Earnings Implied Volatility Crush

    Earnings crush is the fall in implied volatility after earnings is announced. Typically, earnings announcements cause the price of the stock to move more than normal. The move will have more effect on short dated expirations since the day of earnings large move has more weight than the rest of the days with normal moves. 

    By ORATS_Matt,

    • 0 comments
    • 353 views
  • Why Not to Hold Strangles Through Earnings

    In my previous article, I described a strategy of buying strangles a few days before earnings and selling them just before earnings. In this article, I will show why it might be not a good idea to keep those strangles through earnings.

    By Kim,

    • 0 comments
    • 388 views
  • How to Prepare for Crypto Downturns

    Most cryptocurrency owners skipped a heartbeat when the bitcoin fell to 50% from its all-time high. According to experts, such nasty downturns are natural, and the crypto market may witness such downturns now and then.

    By Kim,

    • 0 comments
    • 520 views
  • Tradier Brokerage Special Offer

    Tradier Brokerage is partnering with SteadyOptions to offer a special promotion for SteadyOptions customers: Open an account with Tradier Brokerage and get no subscription fees for 3 months, plus all ACAT fees will be waived. After opening an account, you will also receive 3 months of free access to TradeHawk, our full-featured customizable trading platform.

    By Kim,

    • 0 comments
    • 662 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