5 min Bollinger Bands Intraday System

On a chart of 5-minute bars for a stock, plot out the 10-bar moving average and the Bollinger bands for 2 standard deviations on either side of the average. Then apply the following system:

Buy when the stock falls 3 percent below its lower band. Hold until at least the end of the 5-minute bar where the stock was bought.

Sell when the stock hits a 1 percent profit target or at the end of the second bar after the stock was bought.

The critical issue is how to keep track of all the stocks one is interested in. Before the open, use charting software such as eSignal or TradeStation, or Wealth-Lab (which is the software I use for all of my testing) to identify the Bollinger band levels for each stock. It is then possible with all of these packages to set up alerts and even interface with direct-access brokers, such as Interactive Brokers or Cybertrader, to actually make the trades automatically.

The key in all of these examples is time. Basically, the market has such an

extreme and quick selloff in order to trigger this system that the stock ei-

ther bounces back immediately or flounders about. If the latter, then we

promptly get out since we are only looking for our profit target within the

ten minutes following the entry bar.

ORCL, 5/20/2002, 10:30 AM

Merrill Lynch, in a post-Blodget fury of tech pessimism, reiterated a broads weeping recommendation the morning of May 20, 2002, to sell technology stocks into any strength. While their prediction proved mildly prophetic for all of two months, anybody short technology at May 2002 levels would have been killed over the following year. Nevertheless, the panic to get out of the popular tech issues, for instance ORCL, was enough to trigger a signal on ORCL at 10:30 AM at 8.73 (1). In a brief flurry of selling, it hit 3 percent below its lower band, which it had been steadily walking down all morning. Buying at the critical level and holding until the open of the next 5-minute bar would have resulted in a quick 3.3 percent profit with the sale at 9.02.

5 min Bollinger Bands System

MSFT, 4/3/2000

Many of examples occur close to the open of the day, which is the time when there is the most volatility and also the most panic. The market has had all night to hear and absorb news, and thus the open is when the most participants at once are acting on that news.

Look at Figure 2. On April 3, 2000, MSFT gapped down and triggered signals for two five-minute bars in a row, at 9:30 AM at the open and 5 minutes later at 9:40 AM . The first signal was sold off at the close of the second bar at 47.69 for a 1 percent profit, and the second signal, which was bought at the open of the second bar at 47.44, was promptly sold at 47.91 for a 1 percent profit.

5 min Bollinger Bands Intraday System

AMAT, 11/12/01

On the morning of November 12, 2001, a plane crashed near Kennedy air port. The crash was not apparently an act of terrorism but nobody knew that at the time. Futures spiked lower and the tech stocks, which were hit hardest during the week after September 11, 2001, suffered a minicrash im-

mediately prior to the open. Being alert and capitalizing on the panic would have enabled one to buy AMAT, which triggered a buy signal at its premarket low at 18.20 when it hit 3 percent lower than its lower Bollinger band (Figure3, . Holding to the close of that 5-minute bar would have enabled one to sell immediately at 19.33 for a 6.15 percent profit.

5 min Bollinger Bands Intraday System

 

5 Min BB System, 2/2/02–6/30/03 results

 

You can apply this system also at the Forex Majors (with 20-30 pips outside the bands).