Creating Your Own Trading System by Rene Koch, Ph.D.
It can be done — and without the headache you
IN technical analysis, when you
hear the word band it consists
of two boundaries: one
above and one below the
price series similar to what
you see in Figure 1. In that, the daily price chart for Nextel (NXTL), the
thick red line is the lower boundary of a
“constant” band. Whenever prices go below
the red line, a buy signal (blue circle) is
generated. One or two bars later, the position
is closed (red circle). The green background
identifies the profitable trades.
Usually, prices move within a certain range. If something unexpected happens, prices rise above or
fall below their usual range due to panic (or enthusiasm).
After some time has elapsed, the event is forgotten and prices
return to their usual level. You’ll find this phenomenon based
on mass psychology to be applicable in any market that is
influenced by human participants.