Price Headley's Acceleration Bands serve as a trading envelope that factor in a stock's typical volatility over standard settings of 20 or 80 bars. They can be used across any time period, though Headley prefers to use them most across weekly and monthly timeframes as breakout indicators outside these bands. Using the shorter time frames can define likely support and resistance levels at the lower and upper Acceleration Bands.
Acceleration Bands are plotted around a simple moving average as the midpoint, and the upper and lower bands are of equal distance from this midpoint.
Upper Band: Simple Moving Average of (H * (1 + 4 * (H - L) / (H + L)))
Lower Band: Simple Moving Average of (L * (1 – 4 * (H - L)/ (H + L)))
The Period determines the length of the moving average. The Width allows you to increase or decrease with distance between the lines.
"After studying many different indicators to find where this "breakout point" appeared to reside in most stocks, I developed my Acceleration Bands indicator. There are several things I can tell you about it here publicly:
- Usually I am looking at the last 20 bars on the Acceleration Bands - on a daily chart this incorporates roughly the last month's trading activity, while on a weekly chart this covers 4-1/2 months and a monthly chart just over 1-1/2 years of price action.
- The upper and lower Acceleration Bands are plotted equidistant from the simple 20-period simple moving average (the middle blue line in the charts below). A daily chart shows a 20-day moving average, and a weekly chart plots a 20-week moving average.
- Acceleration Bands adjust for a stock's volatility - the more volatile the stock's price action over the last 20 periods, the wider the bands will be around the moving average.
- Once I see two consecutive closes above the upper Acceleration Band, I get a buy signal - on trending stocks this will often lead to a major upside Acceleration move - on choppy trading range stocks, this will often be a headfake - I use historical data , other indicators and several entry and exit rules to further narrow down the signals.
- One close back into the Acceleration Band signals a traditional exit of the trade, as the Acceleration period is now likely to end."
-- Price Headley Bigtrends.com