- Neapolitan Bands can help identify points that a trend starts and ends, as well as reversals when price is ranging.
- These bands are typically paired with another indicator like Guillot did to help separate/time trend or reversal signals. (He used , Slow , and )
Parts of this indicator:
- The period is by default 55 to identify "intermediate" trends. Not short or long term ones.
- The blue area shows the 1st standard deviation. This is the "normal range" where price "likes" to be.
- The green area shows the 2nd standard deviation and identifies/defines trends. Closes in this area are used for entering trends long or short.
- The red area shows the 3rd standard deviation that shows either a spot to take profit/enter a reversal trade, or a point where the market is free falling.
Trend trading rules:
- Entry and exit signals for trends are based on price closing above and below the 1st standard deviation, or blue area. If you expect a , you buy once price enters the upper green area.
- Guillot recommends setting a stop loss to the MA period of the Neapolitan Bands. So if it's 55 periods, you set the stop loss at the 55 .
Reversal trading rules:
- For reversals Guillot says, "In a trading range, bands act as supports and resistances. In extreme conditions reversals can occur within or past the 2nd standard deviation." For us, this means that technically anywhere in the green or red areas, a reversal can occur when the price is ranging. Typically this happens at the edges of the bands.
The "edge to edge" trade:
This is a strategy I took from and applied to the Neapolitan Bands. An "edge to edge" trade is when price closes back into the blue area from one edge, and price travels all the way to the other edge of the blue area. This can apply going from the edge of one green area to the other edge.
Note that this is one piece of Guillot's trading system, and not the whole thing. On top of that I have modified the original parameters to suit the function of trend following, and added an extra . Using a shorter period like 20 is more optimal for shorter expected trends or reversals, and it's what Guillot used himself.
Thanks to Sean Nance for reminding me the indicator looks like ice cream! ( coming up with the name :P )
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.