the hAndbook of technIcAl AnAlysIsentry breakouts. In Figure 12.12, we observe Gold prices being very effectively
contained by the visually tuned fixed percentage bands over a period of one
year from February 2012 to February 2013. Notice that in very quickly ris-
ing markets, price sometimes fails to test the lower bands during dips in the
uptrend.
As mentioned in an earlier section, the bandwidth of fixed percentage bands
maintains a fixed percentage value of its SMA. Therefore on a linear or arithmeti-
cally scaled chart, the bandwidth will be seen to increase in size as prices rise. One
way to resolve this is to employ logarithmically scaled charting where an equal
distance on the charts corresponds to equal percentage increments. Since fixed
percentage bands are also of a fixed percentage nature, the bandwidth will remain
unchanged at all prices. Figure 12.13 compares Google’s fixed percentage bands
on both logarithmically and arithmetically scaled charts.
Volatility bands
There are three popular of volatility band overlay indicators:
- Bollinger Bands
- Keltner Bands
- Stoller Average Range Channels (STARC Bands)
Bollinger Bands are by far one of the most widely used price containment
indicators. It is a simple moving average with an upper and lower band. Each
band is exactly two standard deviations away from its simple moving average.
A closing violation above or below either band represents an entry signal. The
bands represent levels of relative overextension in price. Hence price may be
overbought at low or high prices. Price occasionally tags or walks the bands
Figure 12.12 Fixed Percentage Bands Containing Price Volatility in Gold.
Source: MetaTrader 4