9 – M2L5 13 Breakout Strategies V4

Trading might use metrics availability to define trading signals. For example, you can take a fix length rolling window and calculate the mean and standard deviation of prices within that window. If we draw a line, two standard deviations above and below the rolling mean, we can get a sense of the trend and tendency to fluctuate of prices, these lines are called Bollinger Bands. We can use Bollinger Bands to generate trading signals. For example, we might think that if the price is below the lower band and starts to cross back inside towards the mean, that the price is still fairly low and on the rise, this might be a good time to buy. We might also think that if the price is above the upper band and starts to move back towards the mean, that this might be a good time to sell. This is one type of strategy you might use to take advantage of situations when the stock price continually returns to its running mean. Alternatively, when the price hits the upper band, you may think that is going to keep going that it’s breaking out to take advantage of these situations, you can define a slightly different type of strategy. If the price of a stock is not very variable but continues to increase, you can get a situation where it keeps increasing but never hits the upper Bollinger Band defined by the standard deviation of the prices. Instead, you can use an upper band defined by the maximum value within a rolling window. If the price continues to increase, it will continue to reach new maxima and will hit that upper band. One strategy you might take defined by this signal is to enter a long position on the stock when it hits the rolling max and enter a short position when it hits the rolling min.