The mathematics defines an envelope of values by using the Highest High or the Lowest Low of the Last ‘n’ Periods.
Properties
Period1: The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. If the default length of the study is chosen (the software uses a period of 10), the study will return the highest of the high price values over the previous 10 bars.
Period2: The number of bars in a chart. If the chart displays daily data, then period denotes days; in weekly charts, the period will stand for weeks, and so on. If the default length of the study is chosen (the software uses a period of 10), the study will return the lowest of the low price values over the previous 10 bars.
Interpretation
The rules generally followed for this study are:
- Enter the market when one of the bands is penetrated. This indicates a possible start of a trend.
- Exit and reverse the position when the opposite band is penetrated.
Another rule you may want to apply is the Donchion’s rule:
- Cover short positions and go long whenever the price exceeds the high of the previous four weeks.
- Reverse long positions and go short whenever the price exceeds the low of the previous four weeks.
Content Source: FutureSource