One of the biggest challenges in trading is to narrow your pool of stocks to a number that is more manageable. In Bluefin, we use things like fundamentals, relative strength, volume, and sector to weed out the weak from the strong. You can add another layer to this by applying a Bollinger bandwidth scan to find stocks in a consolidation. During any given week a handful of stocks will rest after an initial thrust, setting up for the next leg.
Bollinger Bandwidth is the difference between the upper and lower Bollinger Bands divided by the centerline of the Bollinger Bands. As a stock moves sideways the bands contract and the value is smaller compared to a stock that just had a large move where the bands have expanded.
In charting software such as TC2000, you can apply this indicator to your chart and then sort your watch list on the results. Below are instructions on how to apply this filter to your watch lists.
Xcel energy is the ideal pattern we’re trying to find. The stock was in an uptrend, consolidated for a week or more. We want to catch it as it moves above that consolidation.
1. First click “Add Indicator” found on the chart pane in TC2000. Once the “Select Indicator” dialog box appears, type “Bollinger” into the search field to narrow down the results. Click “Bollinger Bandwidth”.
2. The Bollinger Bandwidth indicator will be added to the bottom of your chart pane.
3. Click the title “Bollinger Bandwidth” and select edit to bring up the Edit Bollinger Bandwidth dialog box. Adjust the Period to fit your timeframe. I like shorter time frames so I use a 10 day period. Many traders use a 20 period. Play with it and see what results work for you.
4. Click the title “Bollinger Bandwidth” again. Now, click Show values in WatchList.
5. The column should appear in your watch list pane. Click the column header “BBandW 10 2 Daily” to sort the list from lowest to highest.
Finally, just tap the spacebar to toggle through each chart. Stocks in tight consolidations will appear first.
No scan is perfect, but hopefully this article will give you a way to find consolidation patterns quicker and easier.