Acceleration bands can add much-needed trend identification to your trading technical analysis. We look at what they are and how they add to your decision-making process.
- Making Sense of Acceleration Bands
- The Best Way to Trade with Acceleration Bands
- How to Use Acceleration Bands
Well-known investor Price Headley came up with Acceleration Bands near the start of the millennium and it’s a system that he based on the notion that the best time to enter a trade is just at the point when the asset is trending, although it won’t have given any strong indications yet about whether it’s about to move up or down.
The acceleration bands show how volatile the price has been over several bars, and the user can choose how many. The default value is usually 20 bars. The system uses a simple moving average to find the midpoint, which the upper and lower bands are equidistant from, a bit like you see with Bollinger Bands.
Making Sense of Acceleration Bands
With this indicator, you buy or sell stocks (or any other chartable asset) according to whether the price goes above or below the upper and lower bands. A price that suddenly surges over the top band is said to have broken out, and some would take this as a signal to buy.
A system with this kind of focus might be a blessing for options traders, where it’s very important to be right about directional strategy and particularly timing, as they trade an instrument with a limited lifespan. When the price re-enters the zone between the acceleration bands you can take this as a signal to get out of a long position.
It’s a strategy based on momentum which is useful for anyone who bases the way they buy and sell shares on fundamentals. Essentially, people who want to invest in good value assets, buying them low and selling them high, can benefit. When a share price heads above the top acceleration band in a big way they’ll know they should be asking themselves if it’s now becoming too expensive.
Not everyone is the same though. Others may view breakouts above the top acceleration band as confirmation that there is an upward trajectory and so great scope for additional gains, signalling that it still might be worth buying. Conversely, equal and opposite movement could be seen as a sell signal. It all hinges on the notion that volatility will trend over time, causing the price to shift one way in particular.
The Best Way to Trade with Acceleration Bands
What kind of stocks are most appropriate for this kind of momentum-centric approach?
- Those where earnings improve by at least 20% a year
- Those in sectors like technology or biotech, which are considered to be growth industries.
- If the stock is already trading near a 52-week high then it’s more likely to see acceleration than a “value” choice would be.
How to Use Acceleration Bands
As we said before, it’s common to look at the last 20 bars, and that covers a month, or around 21 trading days if you apply it to the daily chart. It also covers 4-5 months of informtion for the monthly chart, over 18 months. If the stock is more volatile the acceleration bands will be further apart and get closer together if it is less volatile.
Price Headley has said that he takes two consecutive closes above the top acceleration band to be a buy signal, but he has also said that he does not rely on them alone, applying additional rules and indicators to help shape his investment decisions.
As soon as the price dips back inside the acceleration bands, it’s time to close the trade because the acceleration period is clearly over.