Projection Bands – Strategy, Rules, Settings, Returns, Performance

The right trading tool might be one that encourages you to look for buying opportunities when the rest of the market is screaming sell and selling opportunities when the market is screaming buy — this describes the Projection Bands. What do you know about this tool?

Projection Bands in trading is a technical analysis tool that traders can use to predict future price ranges based on the price range over a chosen period. It consists of an upper band and a lower band derived from the highest and lowest prices over a given period and projected into the future, parallel to a linear regression curve of that given period.

In this post, we will take a look at most of the questions you may have about the Projection Bands: what it is, how it works, and how you can use it to improve your trading strategies. Let’s dive in!

Key takeaways

• Definition: Projection Bands are a technical analysis tool used to predict future price ranges based on historical price ranges over a selected period.
• Consist of an upper band and a lower band, derived from the highest and lowest prices over a given period and projected forward using a linear regression line.
• Origin:
• Developed by Mel Widner and introduced in the July 1995 issue of Technical Analysis of Stocks & Commodities.
• Defines the expected trading range based on past price movements.
• Unique Characteristics:
• Unlike Bollinger Bands or similar tools, Projection Bands utilize the linear regression slope to project future trading ranges.
• The bands provide directional signals when prices touch or cross the upper or lower limits.
• Trading Implications:
• Price typically oscillates within the two bands.
• Upper band: Signals a potential price correction when reached.
• Lower band: Suggests a potential upward price move when crossed.
• We show you a complete Projection Bands strategy complete with trading rules.
• If you want to look at other indicators, please read our trading indicators list.

What are Projection Bands in trading?

Projection Bands in trading is a technical analysis tool that traders can use to predict future price ranges based on the price range over a chosen period. It consists of an upper band and a lower band derived from the highest and lowest prices over a given period and projected into the future, parallel to a linear regression line of that given period.

Created by Mel Widner, the projection bands indicator was introduced to the trading community in the July 1995 issue of Technical Analysis of Stocks & Commodities magazine. It outlines the expected upper and lower boundaries of the normal trading range of an asset from that of the chosen period in the past.

The indicator differs from the other bands/channels/envelopes, such as the Bollinger Bands, in that it makes use of the linear regression slope to forecast the possible evolution of the trading range in the future. As such, it offers a different kind of bands, which indicate directional price reversal when the price reaches the upper or lower band.

Most times, the price swings remain within the two bands. So, when the price reaches the upper boundary, traders expect a price correction, and when it crosses the lower band, traders expect prices to move upwards.

Projection Bands trading strategy – rules, backtest, returns, and performance

We didn’t find anything fruitful for the Projection Bands, so we use the Projection Oscillator, a derivative of the bands.

However, the indicator is pretty useful, so we save the trading rules for our paying members (become a member).

We backtest the trading rules on Treasury Bonds the ETF with the ticker code TLT):

It’s not that many trades, but we get the following performance, statistics, and metrics from TLT’si inception until today:

• Number of trades: 100
• Average gain per trade: 0.5%
• Annual returns: 2.4%
• Win rate: 70%
• Time spent in the market: 4%
• Risk-adjusted return: 56%
• Max drawdown: 5%

How do Projection Bands work?

Projection Bands work as the upper and lower boundaries of an asset’s normal trading range. These bands are derived from the highest and lowest prices over a chosen period and projected into the future, parallel to a linear regression curve of that period.

The price swings often stay within the bands, and as a result, when it reaches the upper band, the market is considered overbought. Likewise, when the price reaches the lower band, the market is considered oversold. The logic here is that amateur buyers and sellers, under the influence of FOMO (fear of missing out), push the price to the extremes — the upper and lower bands — which are unsustainable levels. So, the price tends to correct or reverse after hitting such levels.

Traders use the upper and lower bands to generate signals. A buy signal is generated when the price reaches the lower band and reverses, while a sell signal is generated when the price reaches the upper band and reverses. However, it is important to combine it with other indicators or other forms of analysis.

Why are Projection Bands important for traders?

The Projection Bands are important for traders because they show traders unsustainable levels, where the price could reach and potentially reverse. These levels are marked by the upper and lower bands, which are projected from the highest and lowest prices over a chosen period.

The bands are projected parallel to a linear regression curve of that chosen period into the future, which makes the indicator predictive. That is, it shows traders beforehand where the price is likely to correct or reverse if it hits that level. Thus, traders can use it to formulate mean-reversion strategies when the market is range-bound and trend-continuation strategies when the market is trending.

What is the purpose of Projection Bands?

The purpose of Projection Bands is to show levels where a price swing may be considered unsustainable and likely to reverse. Such levels are marked by the upper and lower bands, which are lines projected, parallel to an n-period linear regression curve, from the highest and lowest prices within that selected period.

When the price reaches the upper band, the market is considered overbought, and if the price reverses afterward, a sell signal is generated. Similarly, when the price reaches the lower band, the market is considered oversold, and if the price reverses afterward, a buy signal is generated.

How can Projection Bands help predict price movements?

The Projection Bands help predict price movements by showing levels where the price may potentially reverse from. Those levels are delineated by the upper and lower bands. The price hitting those levels shows that the price swing is becoming unsustainable and may not continue much further before reversing or at least making some form of correction.

When the price reaches the lower band, it is likely to reverse to the upside, and when it hits the upper band, it could reverse to the downside. However, it makes sense to consider the direction and momentum of the trend because, in a strongly trending market, the price can continuously push beyond those levels. For instance, in a strong uptrend, the price can keep making new highs with each bar, thereby pushing the upper band for as long as it can last.

What are the key components of Projection Bands?

The key components of Projection Bands are as follows:

• The upper band: This is a visible line projected from the highest price of a chosen period into the future. It stays above and parallel to the linear regression curve of the same period and determines the upper boundary of the trading range.
• The lower band: This is the other visible line of the indicator. It is projected from the lowest price of a chosen period into the future, running below and parallel to the linear regression curve of the same period. This band determines the lower boundary of the trading range.
• The linear regression curve: In most platforms, this is not visible on the chart, but it is what determines the trajectory of the upper and lower bands.

How do Projection Bands compare to Bollinger Bands?

Compared to Bollinger Bands, the Projection Bands are simply a projection of the normal trading range over a specified period rather than a measure of volatility changes in the market like the former.

Bollinger Bands measure the moving average of price and plot a band above and below the average at a certain number of standard deviations away, whereas the projection bands draw an upper and lower band from the highest and lowest prices over a chosen period and project them into the future following the trajectory of a linear regression curve of the same period.

What timeframes are best for using Projection Bands?

The best timeframes for using Projection Bands will depend on your trading style and the result of your backtesting. If you are a day trader, your best timeframe will be from one of those intraday timeframes, such as the hourly, 30-minute, 15-minute, or 5-minute timeframe. You will know the best out of these from the result of your backtesting.

If you’re a swing trader, on the other hand, you may have to choose between the usual swing trading timeframes, such as the daily, 8-hourly, and 4-hourly timeframes. From your backtesting results, you will know the one that performs best for your trading strategy.

How do you calculate Projection Bands?

To calculate Projection Bands, you can use this formula from MultiCharts:

Lower Projection Band = PLC i = MIN (C i,j ), for j = i-n+1 to i

Upper Projection Band = PUC i = MAX (C i,j ), for j = i-n+1 to i

where: C[i,j] = C[j] + SC[i,n](i – j )

SC[i,n] represents the slope of the least-squares line fit to closing data.

i – refers to today’s trading day

j – refers to each lookback trading day

n – refers to the lookback period of n trading days

What settings should I use for Projection Bands?

The settings you should use for Projection Bands will depend on your trading strategy, the market you are trading, and ultimately, the result of your backtesting. The default settings for the indicator on many platforms are 14 for the lookback period and ‘Close’ for the price type, but you can change them to what you want.

You can use any period that works best for your strategy and also set the price to any type you prefer — high, low, open, typical price, median price, and so on. The objective way to know the right settings to use for your trading strategy is to backtest different settings to see the one that works best.

How are Projection Bands different from other volatility indicators?

The Projection Bands indicator differs from other volatility indicators in that it simply projects the normal trading range over a chosen period into the future, whereas other volatility indicators use different measures of volatility, such as standard deviation and ATR, to estimate where to plot their volatility bands.

For instance, the Bollinger Bands plots the upper and lower bands at a certain number of standard deviations away from the mean price, while the Keltner Channel uses an ATR multiplier to plot its volatility bands. The projection bands are simply projections of the highest and lowest prices over a chosen period into the future, parallel to a mean regression line.

Can Projection Bands be used for day trading?

Yes, Projection Bands can be used for day trading if used to create a profitable strategy that works for short-term trading and then trade it on the right timeframe. The most suitable timeframes for day trading are intraday timeframes, such as the hourly, 30-minute, and 15-minute timeframes.

The key thing is to create a trading strategy with a proven edge on any of these intraday timeframes. This means you have to backtest it on those timeframes to ascertain that it is suitable for day trading.

How do traders use Projection Bands for trend analysis?

To use Projection Bands for trend analysis, traders consider the slope of the bands. If the bands are sloped to the upside, the trend is likely upward. On the other hand, when the bands are sloped downwards, the trend is likely to be the downside.

However, good traders don’t just use the Projections Bands alone for trend analysis. They consider the price structure — the swing highs and lows. Some also use other trend indicators, such as moving averages, to ascertain the presence of a trend and its direction.

What is the upper band in Projection Bands?

The upper band in Projection Bands is the upper one of the two lines that make up the indicator. This line is derived from the highest price of the trading range over a chosen period and projected into the future. It stays above and parallel to a usually invisible linear regression line of the same period.

The upper band determines the upper boundary of the trading range and indicates the overbought level in the market where the price could potentially reverse to the downside.

What is the lower band in Projection Bands?

The lower band in Projection Bands is the lower one of the two lines that make up the indicator. It is derived from the lowest price of the trading range over a chosen period and projected into the future. It runs below and parallel to a usually invisible linear regression curve of the same period.

This lower band determines the lower boundary of the trading range and indicates the oversold level in the market where the price could potentially reverse to the upside.

How can Projection Bands help identify breakouts?

Projection Bands may help identify breakouts if the price crosses beyond either of the bands and continues to move in that direction. This can happen when the market is trending strongly in that direction. However, this does not happen very often and the projection bands are not the best indicator to analyze a breakout. It may be wise to use momentum and volume indicators to confirm the breakout before considering trading it.

Can Projection Bands signal potential reversals?

Yes, Projection Bands signal potential reversals when the price reaches any of the bands and turns. When the price reaches the upper band and prints a bearish bar, it signals a potential downward reversal.

Likewise, if the price reaches the lower band and prints a bullish bar, it signals a potential upward reversal. You may need to confirm these signals with other forms of analysis that assess the direction and momentum of the main trend.

How do Projection Bands react in volatile markets?

How the Projection Bands react in volatile markets will depend on whether the market is trending or range-bound. In trending volatile markets, the indicator is dragged by the price in the trend direction, with some of the big price bars stretching the band on their way and the opposite band following along.

For a range-bound market, higher volatility increases the width of the band, while lower volatility reduces it.

How do you interpret signals from Projection Bands?

To interpret signals from Projection Bands, you check which of the bands the price has reached. If the price reaches the lower band and reverses, a buy signal is generated. On the other hand, when the price reaches the upper band and reverses, a sell signal is generated.

However, you will need to combine this with other indicators or other forms of analysis to confirm the signal.

Can Projection Bands be combined with other indicators?

Yes, the Projection Bands indicator can be combined with other indicators to improve the quality of the signals. Since the indicator’s signals are overbought and oversold reversal signals, it will make sense to combine it with trend and momentum indicators, as well as volume indicators where applicable.

You will use the trend indicator to identify the trend and the momentum indicator to gauge how strong the trend is. The idea is to not trade a reversal signal in a market that is trending strongly. Rather, use the reversal signal to trade find a continuation trade in the direction of the trend after a pullback.

What are the limitations of using Projection Bands?

The limitations of using Projection Bands include:

• It is not a good indicator to gauge the strength of a trend.
• Its signals are mostly reversal signals.
• Without the help of other indicators or other forms of analysis, it can cause you to trade against a strongly trending market.
• It is not suitable for measuring market volatility.

How can Projection Bands improve my trading strategy?

Projection Bands can improve my trading strategy in different ways. These are some of them:

• You can use them to spot oversold market conditions in an uptrend so you can look for buy setups for trend continuation — this also applies to a downtrend where you look for overbought conditions during a rally.
• You can use the bands to guide your stop-loss levels.
• If you are riding a trend, you can use the bands to guide your trailing stop.

Are Projection Bands useful for long-term traders?

Yes, Projection Bands can be useful for long-term traders if used with the right strategy and traded on a suitable timeframe. Long-term traders trade on very high trading timeframes, such as the monthly or weekly timeframe.

If a projection-bands-based strategy is proven to have an edge on any of these timeframes, then it can be useful for long-term trading.

Can Projection Bands help reduce trading risk?

Yes, Projection Bands can help reduce trading risk if used properly. Apart from helping you identify the levels to look for high-probability trend-continuation trades during a pullback in a trending market, it can help you with where to place your stop-loss orders and trailing stops.

Knowing the level of your stop loss also influences your position sizing.

Where can I find Projection Bands on trading platforms?

You can find Projection Bands on trading platforms in the indicator section. Simply search for Projection Bands and double-click on the highlighted indicator. If the indicator is not preinstalled in the platform, you may need to get a programmer to create a custom version for your trading platform.