No, I am not talking the sleazy characters who hang around pool halls and horse racing tracks. You know the guys I mean. Their buddies call them “slim” or “fat.” And they’re more than willing to provide you with “guaranteed-to-win” stock market picks for a small upfront fee.
The Slim Jims and Fat Boys I’m referring to are stock market guides. They offer traders a deep insight into future stock and overall market direction. The best part is these two guides are free to use. Most likely they are built into your on-line trading & technical analysis platform.
If you haven’t guessed it already, Slim Jims and Fat Boys are technical analysis patterns derived from Bollinger Bands. After reading this article two things will happen. First, you’ll have an actionable understanding of Bollinger Bands, Slim Jims and Fat Boys. Second, these tools may become your best trading friends. Let’s begin by explaining Bollinger Bands.
Bollinger Bands are my favorite technical indicator. I utilize them when analyzing the stock market and individual stocks. They are my favorite technical analysis tool for several reasons.
1. They Are Logical
Bollinger Bands make sense. They are not some esoteric TA tool that is difficult to interpret or understand.
2. They Are Easy To Use
A quick glance at the chart with Bollinger Bands is all it takes to tell if price is over extended in a bullish or bearish sense. It’s instant information and a must for short term traders. In addition, Bollinger Banks make the task of looking at many charts during the day much easier.
3. They Are Free
Most technical analysis charting packages built into your on-line broker’s trading platform offer Bollinger Bands
What are Bollinger Bands?
Bollinger Bands were created by John Bollinger in the early 1980’s as a way to measure volatility. They are an expansion of the “trading bands” idea, first introduced by J.M. Hurst… and… further refined by Marc Chaiken.
Simply stated, Bollinger Bands are Moving Averages that envelope price bars on a chart. John Bollinger developed a statistically-based standard for the price bands, built trading concepts around them, and popularized their use.
Standard Bollinger Bands consist of a 20 period Moving Average, an upper band 2 deviations above the MA, and a lower band 2 deviations below the MA.
For those who are mathematically inclined, here is John Bollinger’s formula for the bands…
Don’t worry! You certainly don’t have to understand this formula to use Bollinger Bands profitably. However, for those of you do understand it, it provides a solid base as to how the bands are derived.
What Do Bollinger Bands Do and How To Use Them
Bollinger Bands allow the trader to visually determine if price is high or low on a relative basis.
This means high or low as price relates to the average… which… is the middle line or 20 periods MA. Price is over extended (one way or another) if the price bar pushes or breaks through the upper or lower band.
The theory is to short if the upper line gets pierced or hit. Because it is likely price will revert back to the mean (the middle line). Or you buy should the lower line get hit or pierced awaiting the reversion to the mean.
Price can ride the upper or lower band for a long time prior to reverting back to the mean.
Therefore, this shouldn’t be used as a buy or sell signal… but rather… as a confirmation tool for other indicators.
For example, the price bar pierces the upper line, but your other indicator does not confirm the bullish strength— this is a sell trigger.
If the indicator does confirm (and you are already in the trade), this is a sign to stay in the trade. The opposite is also true at the lower band.
Now you have a basic understanding of Bollinger Bands and how to use them. The bands are better used as a divergence confirmation indicator… rather than… a standalone trading tool. However, for analysis purposes, the bands alone have many uses to help you visualize the state of the market and individual stocks.
Slim Jims and Fat Boys
Ok, now back to my old friends Slim Jims and Fat Boys. These Bollinger Band patterns are highly accurate in projecting what will happen next with price. Let’s first take a look at Slim Jims.
Slim Jims are also known as Bollinger Band Squeezes. What you want to watch for is narrowing Bollinger Bands. Most textbooks teach to look for Bollinger Band widths at the low end of their six month range. You don’t have to rely on just looking at the bands. There is an indicator called Bollinger Bandwidth… which… is a screener to find Slim Jims.
Once you locate a Slim Jim, wait for the price to break out above or below the narrow range. Next, enter your trade in the same direction of the break out.
Remember, Slim Jims do not foretell direction. They merely indicate a lowering of volatility. It’s critical to wait for the break out of the Slim Jim prior to entering the trade directionally.
Once a Slim Jim break out occurs, price is likely to travel enough of a degree to yield profits. This is due to the volatility expansion which is inherent within the breakout.
Slim Jims can also be used by short term traders. Simply lower the time frame on your chart and everything else remains the same.
Fat Boys
Fat Boys are the opposite of Slim Jims. Fat Boys occur when the Bollinger Bands expand to a relative wide level. This expansion indicates surging volatility. When you notice the Bollinger Bands expanding into Fat Boys this means the market is trending in the direction of the expansion. This expansion confirms the trend. As the market trends though, any deceleration in momentum will cause the Bollinger Band which was headed away from the price trend to turn back to the same direction of the price trend.
This chart shows how the Slim Jim turns into a Fat Boy as price plunges. Next, notice how the upper line of the Fat Boy starts to turn down. This indicates price has started to change trend.
The Takeaway
Bollinger Bands are powerful technical analysis tools. Look and screen for Slim Jim and Fat Boy patterns that can signal a sharp move or a change in trend direction.