“Modified Bollinger Band” Sell Signal (Preview)

By Lawrence G. McMillan

A few of our subscribers have been rather nervous about the fact that the mBB sell signal has not produced immediate results.  The sell signal occurred on October 25th, with $SPX roughly at 2557.  Even though $SPX has rallied about 1% since then, it has not come close to stopping us out – an action which would require $SPX closing above the +4σ Band.  Since that Band has raced away to the upside, we have a trade that is sort of in suspended animation if you will.   We bought puts to enter the trade, so one knows exactly what his maximum dollar loss could be.  However, we are still of the opinion that this market is tiring out and the sell signal still has a good chance to work.

When we designed this system, we had trouble designing an exit for the system.  Yes, it is stopped out if $SPX closes above the +4σ Band.  Also, we take profits if $SPX closes below the –4σ Band.  We experimented by varying closing prices or intraday prices regarding trade entry.  Also we tested whether one should wait for that complete close below the –4σ Band to take maximum profits (should it be the –3σ Band, or should it be an intraday “touch?”).  The parameters that we are using are the ones that tested the best...

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