How to Identify Topping Action with Bollinger Bands® - Candlestick Patterns Explained by TechniTrader®

Use Bollinger Bands with Quantity Indicators

Bollinger Bands are an outstanding indicator for analyzing sideways candlestick patterns. The bands’ ability to expand and contract revealing the amplitude of price is a critical factor for accurately identifying breakout action before price moves up or down. Use Bollinger Bands topping action to determine that the sideways candlestick pattern is actually a topping pattern.

There is often a fake-out run, which is the final assumption by many smaller-lot traders that the breakout will go to the upside. This is seen in the chart with tiny white candlesticks running up with common gaps, the telltale pattern of Retail Traders’ trading systems.

The stock is in Dark Pool Quiet Rotation™ mode with giant lots selling to lower inventory. The retail run up provides the liquidity to give more impetus to the large lots’ and giant lots’ rotation, and then there is more rotation from Time Weighted Average Price (TWAP) orders triggering, so consequently the stock gaps and runs down. Oftentimes, this can cause a loss for Retail Traders who assume the stock will break out to the upside.

The direction which price will take out of the breakout is determined not by Bollinger Bands, but by Quantity Indicators that reveal whether large lots and giant lots are accumulating or rotating during the sideways action.

Another key factor in identifying sideways platform Bollinger Bands topping action is that the bands will contract during the sideways candlestick pattern and then price will hold below the center line of the bands and contract.

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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses