V. 22:7 (24-35): Creating Your Own Trading System by Rene Koch, Ph.D.

V. 22:7 (24-35): Creating Your Own Trading System by Rene Koch, Ph.D.
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Creating Your Own Trading System by Rene Koch, Ph.D.

It can be done — and without the headache you would expect.

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.

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