Cross sector Bollinger Band position is closed

20 January

The position in the SPDR Financial (XLF) v SPDR Energy (XLE) has been closed. The stop loss was moved to break even on 13 January and was hit on Friday 18 January. The ratio moved back within the upper Bollinger Band.

Thinking about why this breakout did not hold, whilst other breakouts do hold (such as the Japanese stock pair I’ve showed recently), the difference is the lack of an external factor, such as Yen weakness to drive it.

This does not make the volatility contraction a complete red herring, as I have observed many strong medium term moves starting from a volatility contraction. Instead, it shows that the best volatility contractions will have another factor supporting the case, preferably fitting another of my methods. The USD v JPY chart was an example of my long term moving average crossover method. This can be a focus of my search going forward.

Practically, moving the stop loss to break even as soon as possible and/or stopping the trade on a move back within the upper Bollinger Band provide a quick way of telling which trades will work that keeps losses on these trades small.