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Price Headley's Simple Trading System: Using Acceleration Bands & %R

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Price Headley's Simple Trading System: Using Acceleration Bands & %R

  1. 1. Exclusive Free Report for Daily Profit ReadersFor option traders, correctly forecasting short-termprice action is imperative to long-term success and, inmy view; technical analysis is the best way to achievethis. Many would say the "Holy Grail" of technicalanalysis is to find true "leading" indicators ... thosethat point to directional movements and trends as theyare occurring or before they occur, not laggingindicators that show what has already occurred. Ivetested and designed hundreds of technical indicatorsover the years, and I want to share with you one ofmy trading systems that uses two of my favorite and time-tested indictors. The twoindicators? One is Acceleration Bands, which I created. The other is Williams PercentR, which I have modified and created specific rules to utilize that are different than is seenin normal trading systems.A major problem that many traders have is too many signals. In other words, their criterianeed to be tightened and refined. As many of you already know, I look for the Big Trends thatrarely occur—this helps me leverage my capital while reducing the number of total trades. Now,dont be fooled, there is no fool-proof system out there ... so risk control is an important partof any technical system. In life, its good to be an optimist, but excessive optimism in systemdevelopment can easily lead to ignoring the risks and the weaknesses in your trading system. Allsystems have weaknesses. Make sure your systems have a risk control element to it.Today I want to share with you a system that uses only two indicators, Acceleration Bands andWilliams Percent R—remember keep your system simple. First, its important to describe eachsystem independently to see how combining both expose higher quality signals.Acceleration Bands: Available in the MetaStock Big Trends ToolKitDescription: Adaptive bands that contain 95% of price action usually used in 20 or 80 barperiods. Trading signals occur when price action is confirmed outside the bands. This indicator
  2. 2. Exclusive Free Report for Daily Profit Readerstargets the top 5% of moves, keeping traders focused on the best trends.The 20 Bar Acceleration Band Expert Advisor (SPX chart below) shows buy and sell signalsbased on my system. Notice that in the 14 months shown, the S&P500 only exposed a signal 4times, each was profitable. This depicts the 5% theory well - Acceleration Bands highlight onlythe extreme moves for option traders. The issue many traders face is really two-fold; manytraders want more signals and the entry point can use some refinement. Like the Yin & Yangrelationship, Ive developed a system that combines Acceleration Bands with Williams Percent Rto remove any weaknesses and refine trading signals. Lets take a look at how it works.SPX Chart with Acceleration Band Signals
  3. 3. Exclusive Free Report for Daily Profit ReadersFinally, the United States Oil (USO) weekly chart shows a massive rollercoaster trend—with thebullish expansion topping out in mid 2008 followed by the massive sell-off into 2009. This isnot typical, it is a statistical aberration. These are the so-called fat tails where fortunes are madeand Acceleration Bands were created to define just that. Once again, note the BUY and SELLsignals based on the Acceleration band signal over the last 2 ½ years.United States Oil Fund (USO) with Acceleration Bands and Williams’ %R
  4. 4. Exclusive Free Report for Daily Profit Readers Williams Percent R - Traditional indicator available in MetaStock. The Big Trends Willams %R method is available in the Big Trends Toolkit with two separate systems based on breakout and retest (lower risk entries) methods. We have smoothed out and modified Williams Percent R to make it a better and more usable trading vehicle. Description: Larry Williams created the Percent Range oscillator to highlightoverbought versus oversold levels in securities. Traditionally overbought connotates a long exitor sell short entry as oversold would insinuate the opposite, however, we in general consideroverbought to be bullish and oversold to be bearish. The Big Trends Percent R system targets thetop 20th percentile and bottom 20th percentile.In the chart below we have the Expert Advisor for Big Trends ToolKit (BTTK) Percent R RetestSystem applied to the S&P500. My first impression is that there may be too many signals with11 trades in 14 months (compared to 4 with the Acceleration Bands). The Percent R RetestSystem targets lower risk entry points by signaling buy or sell-short signals after a correspondingbreakout confirmation occurs. These pullbacks, or retests, are patterns that help identify fastmoving trades that are immediately profitable. If they do not move in the expected directionimmediately an exit signal is triggered for effective risk control.
  5. 5. Exclusive Free Report for Daily Profit ReadersSPX Chart with Percent R Retest SignalsNotice above that we also have 20 Bar Acceleration Bands applied to the price action -- myfavorite system employs both Percent R and Acceleration Bands; reducing the number of tradeswhile only trading the best pullbacks. I focus on Percent R retests within Acceleration Bandsignals. Lets take a look at an example of this signal further below.When developing a system I look for winners that are at least twice the size of losses and aminimum 50% winning average, however, Ive found that 60% winning average isoptimum and realistic. Thats why using Acceleration Bands and Willams Percent R hasbecome one of my favorite two indicator systems. Acceleration Bands highlight extremely strong
  6. 6. Exclusive Free Report for Daily Profit Readersmoves, while Percent R Retest Method highlights low risk entry points within thoseAccelerations. In addition, I found that this system works particularly well on individualstocks, which typically provide more Acceleration signals than market averages like theS&P500.For ease of learning I want to show you a quick example of a signal using both indicators withinthe same time frame as the charts above on the S&P500. In the chart below we have theAcceleration Band Expert Advisor (20 Bar) exposing a sell-short signal based on momentum.Notice that in the days after extreme selling signals an Acceleration short signal, we see abounce, or retest, in price action. This typically occurs from value seekers; however, we knowthat once the trend has accelerated thus far its probable to continue.SPX Chart with Combined System
  7. 7. Exclusive Free Report for Daily Profit ReadersThe blue arrow shows us where Percent R initially confirms bearish activity (prior toAcceleration signal) , and we know that any Percent R spike above 20% is now a qualified retest.Furthermore, if the retest occurs after the Acceleration Band signal its a lower risk entry within ahighly probable signal. Adding the Percent Retest filter to your Acceleration bands will help yoube patient for those lower risk entries after momentum has confirmed; while Acceleration signalshelp you identify weaker trends where retest become reversal.As Ive mentioned, in general keep a trading system simple - I have found that the uniquecombination of Acceleration Band breakouts and Williams Percent R re-tests (utilizingBigTrends’ Percent R methods) is a very effective trading tool & system. I encourage you to starttesting this on your favorite stocks as it has helped me increase my winning percentage, whilereducing those whipsaws that many traders experience from Acceleration Bands alone.Trade well,Price HeadleyBigTrends.com1-800-244-8736