Neapolitan Bands

The Neapolitan Bands were derived from Jean Marc Guillot's 2001 IFTA trading strategy. In his study published by the International Federation of Technical Analysis titled, "Using Indicators from the Derivatives Markets to Forecast FX Moves" Guillot utilizes multiple bollinger bands of various deviations to determine trends and reversals, entries and exits. I isolated this particular part of his overall trading strategy because it has been a useful trend following indicator for me.

Some basics:

• 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 MACD, Slow Stochastic, and RSI)
  

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 bullish trend, 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 SMA.
  

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 Ichimoku Clouds 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 bollinger band. 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 )

Release Notes:

New Feature:
- Baus Bands option in settings.
- Switch back and forth between Neapolitan and Baus Bands.

So, what are Baus Bands?

Typically, the trading rules for the Neapolitan Bands go something like this:
- The blue area is the "normal range." This is where price likes to be.
- Green areas above and below the blue area is the "trending range."
- Red areas show extreme trading conditions that are unpredictable. Reversals do become more statistically probably though.

This was too much, so I developed based off the recommendation of a friend, @CR38TOR_ on Twitter, a slight modification to the Neapolitan bands that removed everything but the information that I personally use in order to trade.

Here's how I interpret the Baus Bands:
- Are we between the green and red clouds? Things are pretty normal. Rangey.
- Is price currently trading in either the red or green cloud? Then we're likely trending.
- Has price moved past either cloud? Then don't trade.

(The following is not personal trading advice and should be considered only educational.)
Trend trading rules are exactly the same as the Neapolitans:
- Enter your position once price has open and closed inside the cloud.
- Long in the green cloud when the condition is met, short in the red.
- On a 55 period (default settings), adding a 21 period EMA to the chart will give you additional confirmation if the EMA is touching/inside/very close to the cloud, long or short.

Release Notes:

I've decided to make the Baus Bands setting a standalone public indicator.

Why are you making Baus Bands standalone?
I didn't like my implementation by adding it as a drop down box option. I was getting questions after telling people about it or when sharing my charts. Traders were asking me "Why can't I find it when I search for indicators?" after I told them that they were the "Baus Bands." They'd be searching that up instead of the Neapolitans, then going into the settings and selecting Baus Bands.

Where do I find the standalone indicator?
Click on Baus Bands, or search it up in the public indicator library.