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Peter this is a great question!
a few things to keep in mind and to observe.
If you look at the Price channel lines you will notice they are much smoother
than Bollinger Bands. This is not an accident but a result of using the
special factor of the average true range of price to calulate the 3 standard
deviation values.
The primary purpose of the bands is to contain the daily AVERAGE price when
the market is NOT Trending. Notice that the daily price range will exceed the
price bands even when the average is being contained within the band. that
means that High value for the day BY ITSELF is irrelevant for this type of
analysis.
That traditional breakout breakout bar we are always looking for to signify a
new trend is always a false bar unless the average for trading day exceeds the
envelope.
In addition, a strong trend will always keep the daily average out of the
price channel.
Now to your question.
Since the primary question we want to ask is "are we trending?" the 3 sigma
level reduces the risk of saying YES" when the real answer is "NO We Are not"
.
The other risk we must manage is getting with the trend too late. That is why
we use the average daily price as opposed to just the closing price. The use
of average price in relation to the channels actually increases the level of
sensitivity to change while reducing the frequency of false breakouts.
Look at the cart again(attached).
5/13/98 potential breakout.
5/14/98 potential breakout
5/15/98 breakout not confirmed.
6/10 potential breakout
6/11 breakout not confirmed.
6/23 potential breakout
6/24 potential breakout
6/25 breakout confirmed and not finished yet.
These examples are based only on the rule given in the original post.(3 plots
outside the channels.) there are other rules but they will be in that book I
mentioned earlier.
Long answer to a simple question, Hope it helps.
All the best
Terry
Attachment Converted: "c:\eudora\attach\BREAKOUT2.gif"
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