High Low Bands

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Introduction

As the name suggests, High low bands are two bands surrounding the underlying’s price. These bands are generated from the triangular moving averages calculated from the underlying’s price. The triangular moving average is, in turn, shifted up and down by a fixed percentage. The bands, thus formed, are termed as High low bands. The main theme and concept of High low bands is based upon the triangular moving average. So, let’s take a look at the triangular moving average and its features.

Triangular Moving Average

Just like other moving averages, a triangular moving average takes into account, the average price of a specific stock over a particular period of time. Triangular moving averages are a bit better than the rest of them because of their ability to generate sharp signals. A triangular moving average is smoother than the others because it is averaged twice. But, why is the triangular moving average used more often? Smoothing of an average will make the specific moving average to be less responsive. Why is it more used when it has more waves than the other standard moving averages?

Practically, it has been observed that triangular moving averages appear to be more responsive to price changes than the other standard moving averages. That is the reason these are used more often to judge price changes.

Triangular moving average can simply be defined as the average of simple moving averages over a specific period of time. Triangular moving averages are calculated as follows:

1. First, calculate the simple moving average of the particular stock:

SMA = (P1 + P2 + P3 ………. + Pn) / n

Here,
SMA = Simple moving average,
Pn = Price of nth bar,
N = Number of bars or time period.

2. Now, averaging the simple moving averages gives us the triangular moving average:

TMA = (SMA1 + SMA2 + SMA3 ……….. + SMAn) / n

Here, TMA = Triangular moving average.

A simple moving average and a triangular moving average differ in their smoothness and way of generating signals. It is said that a triangular moving average is little retarded in generating signals which is wrong in most cases. A triangular moving average is more responsive to price signals than many other moving averages. Interpretation of triangular moving average is just like the other moving averages. When the price crosses the TMA wave line on the upside, it is a signal that the stock will remain in an uptrend in the coming days and vice-versa. Triangular moving average finds its application in High low bands. The bands, both high and low are generated from the triangular moving average of a particular stock.

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Calculation of High low bands

Calculation of High low bands requires some knowledge of triangular moving averages, because that is the base, from which these bands are originated. The above formula shows that a triangular moving average is calculated by averaging a simple moving average. A High low band is calculated from a triangular moving average as follows:

1. Calculate the triangular moving average of the particular stock over a preferred time period.

TMA = (SMA1 + SMA2 + SMA3 ……….. + SMAn) / n

2. Now, the triangular moving average is shifted up and down by a specific percentage. So, two wave lines are formed above and below the stock’s price and these represent the High low band.

Theory

A High low band is made up of the triangular moving average of a particular underlying. To start with, triangular moving average for a specific time period is calculated. Now, this triangular moving average is moved up and down by a specific percentage according to the trader’s preference. The two bands, thus formed are termed as High low bands accordingly. Generally, the underlying trades inside this range for most of the time. When this underlying breaks out of the band, a signal is generated accordingly. If the underlying pierces the High band on the upside, then it is said to remain in an uptrend for a certain period of time, and vice-versa.

Advantages

  1. High low bands can easily generate signals in trending markets.
  2. These bands are more responsive to price changes as these are calculated from the triangular moving average of a specific stock.

Disadvantages

  1. High low bands don’t seem to work well in choppy or sideways markets.
  2. The bands have more number of waves than any other indicator and that makes us difficult to judge the trend.

Conclusion

The whole concept of High low bands lies upon the Triangular moving average. These bands, both high and low are just wave-lines formed by shifting the triangular moving average by some specific percentage on both the sides. Triangular moving averages are smooth in nature and that is the reason these High low bands are more responsive to price fluctuations. High low bands are most effective when it comes to trending markets. These bands could easily generate signals in trending markets. These bands, similar to all other indicators, fail in sideways or choppy markets.