Bollinger Extreme System

monstapips · June 9, 2011, 10:32pm

[B]Bollinger – Extremes Reversion to the Mean System[/B]

This is a system that I back tested on EUR/JPY before, but I lost all my statistics when my computer died

Anyway, the basic premise of the system is that it tries to pick tops and bottoms by buying / selling whenever price is in between the 2.5 and 3.0 Standard deviation Bollinger Bands. My understanding of Bollinger Bands is that once price touches those lines, it means that price has hit an “extreme” and there is a good chance that it will revert back to the middle.

Just so you know, the returns when I tested it on EUR/JPY were quite volatile. There were some years where it did well, and others that well, it sucked.

Now that I have no more data, I’ve decided to begin back testing this system on other pairs and see how I can improve it. It’s a longer term system (based on the daily) so I should be able to get about a decade’s worth of data per pair.

[B]Indicators[/B]
Bollinger Band (SD 2.5, length 20, simple) (blue)
Bollinger Band (SD 3.0, length 20, simple) (red)
ATR (length 20) – I use this to help me calculate the stop
20 SMA – basically the middle of the bands
Daily Chart

Entry and exit

It’s a very simple long term system. I buy (sell) whenever the daily candle closes in between the 2.5 and 3.0 Bollinger Bands. My first take profit point is the middle of the bands (20 SMA). One the first TP is hit, I move my stop to breakeven and let the 2nd position run. My second take profit point is the opposite 2.5 Bollinger band.

I’ve adjusted the stop loss to be equal to 1.5 times the average daily ATR of the day when you entered the trade. I used to use a strict 150 pip stop when I was backesting for EUR/JPY, but lets see how this works.

Here’s a sample of both a long and a short signal

Limitations:

I HAVE NOT backtested for AUD/USD. I know that there are still a lot of tweaks that need to be made for this system. Also, I’m still figuring out how to put this on mt4, but it doesn’t seem to let me make the SD 2.5.

If you have any suggestions, please let me know! I’m just going through different systems right now, trying to see what works for me and what doesn’t.

MaryJ · June 21, 2011, 4:44pm

Hi Monstapips. I have seen something similar to this previously and there is an indicator out there for mt4 which is called ‘Bands’ if you just do a google search for it. You can change the deviation to 2.5 or 2.0 or whatever whereas the Bollinger Band indicator on the mt4 won’t allow it.

Good luck and I will be interested to see other members input.

monstapips · June 22, 2011, 3:35am

Mary J

Thanks for the tip! I’ll take a look and see how it works!

MaryJ · June 23, 2011, 8:39am

Hey Monstapips.

Your thread has prompted me into looking at Bollinger Bands again. There is a pdf floating around called ‘Bollinger Bands on Steroids’ - I found it while googling Bollinger Bands. I think you will find the settings there and the explanation.

The settings I ended up with were: 20 and deviation 2.0 for 1st then 20 and deviation of 1.5 but I guess it really depends on the Currency pair. The last couple of days I have demo traded with that and ended up with quite a few pips (haven’t added them up yet).

Will have to wait a while to see how it goes I might be ‘just lucky’… you know how it is with forex.

I traded GBPJPY EURJPY EURUSD GBPUSD so it looks to be reasonably tradeable over a few pairs at least.

Hope you found the indicator OK

peterwest · June 26, 2011, 3:45am

I’ve tried using BB systems before. How do you get a certain entry that reverses and doesn’t keep going the original way?

MaryJ · June 26, 2011, 11:17pm

I am pretty new to using BB as I tried it a while ago then gave up but have gone through the process of trying everything and sticking at nothing.

The success I have achieved over the last couple of days mentioned in my previous post was due to trading the higher time frames. So to answer your question peterwest – observe the higher time frames. As for precise entry I am not so good at that yet but I guess we need to wait for a time frame of perhaps 1 hour or 4 hour to retrace then continue in direction of trend.

Watching the behavior of the Monthly and Weekly charts I noticed that the price often retraces once it hits the center line (moving average). Most often if it is in the channel (having left the outside Bands) it will go as far as the center line(my theory only – check past history for yourself) therefore I noticed the GBPUSD monthly chart is heading down toward the center line.

I based my trades on this and my first GBPUSD winning trade netted me 55 pips & third 70 pips. Since I am not a seasoned trader I decided to take the profit as I wasn’t so sure of my prediction. My second trade with GBPUSD sustained a 2 pip loss. If I had have stayed in I would have been in profit. After re assessing the charts I went in again for the 70 pip gain mentioned above. Now when I look at it and if I trusted my analysis the first trade would now be 198 pips profit at this moment.

EURUSD is in a similar situation at the moment and made another 55 pips with that.
AUDUSD I traded against the trend on 4 hour chart thinking it would go top of BB but it reversed after it had closed quite high through it. So I have made some losses but need to focus on trading the direction of trend and trust myself more. Eventually I want to be able to stay in trade for several days.

I entered AUDCAD and closed it out with about a 1 pip profit as I felt uncertain. On checking the charts later I would have made a healthy 54 pips.

Sorry for being so long winded but it just gives some idea of somewhere to start and possibilities.

I have much to learn and would love to hear other suggestions.

MaryJ · June 27, 2011, 4:27am

Sorry Monstapips didn’t mean to take over your thread.

I was wondering if you compare timeframes or do you just rely on the bollinger band action in the one time frame?

S1L1K0N · June 27, 2011, 11:05pm

I’ve set this up on a demo account and we’ll see what happens. I live in the Central time zone, so the EU and London market openings occur when I’m sleeping; need something that’s more longer term where I can just check in from day to day.

monstapips · June 27, 2011, 11:15pm

MaryJ,

I actually just created that system using a longer time frame. I wanted it to be purely mechanical, which meant I wouldn’t be going through different time frames. However, after reading your post, I’m gonna start reading that pdf you mentioned and I’m also gonna give it a try looking through different time frames.

Just to be clear, you are using the BBs to help find tops and bottom and the overall trend?

Regarding the middle line, when I was backtesting the old system, I found that it would serve as a good support / resistance point, so that’s why I made it the first TP point. Someone advised me to try and maximize the trade signals by adding to my position, but I’m still working on that.

I might also try to develop a system that is based on a shorter time frame.

monstapips · June 27, 2011, 11:16pm

Which time frame are you currently looking at? My system is based on the daily, so you only really need to check every once in awhile. haha

S1L1K0N · June 28, 2011, 7:38am

I’ve got it running on the daily as well.

MaryJ · June 28, 2011, 8:38am

Hi Monstapips.
I prefer to keep an eye on the highest timeframe which shows the most potential for a long term trade – e.g. at the moment GBPUSD monthly is showing that potential to go to or near the centre line. It would depend on the currency pair – sometimes it could be Daily or Weekly.

I would expect some large moves up within that next few days due to the monthly candlestick coming to an end this week. My experience tells me there is generally a pullback of a candlestick before it closes (depending on the strength of move). When the new candlestick opens you often get a further retracement. It is in a support/resistance area at the moment which could indicate a retracement soon. (could possibly trade the retracement on lower time frames such as 1 hour or 4 hour?)

I generally check quickly through the timeframes down to the 1 hour keeping an eye on the retracements etc., due to lack of confidence in my analysis.

I like the Bollinger bands because they appear to have a clarity of trend and not too cluttered – am still learning about bands squeezing together and their behaviour patterns.

Unfortunately I did not enter at the top of the trend so I am watching this at the moment to see if my theory plays out. I made a few pips but if I get in now and it reverses on me I could be in for some losses. I am looking at other methods as an aid to detect tops/bottoms however I think the BB could possibly tell the whole story.

I also like the double bands because once the candlestick closes below/above the inner double band and in the channel it will often lead at least to the centre line. This is potential for many pips on larger timeframes. Take a look at past price action with the double bands and trend changes within the different time frames.

Another thought. The monthly GU chart overall could be in an uptrend or perhaps a sideways move? Lower bands are going in straight line. If it is sideways price could go to the bottom bands then back up again. I am possibly looking too far into the future with the monthly chart especially since I didn’t get in at the top. Daily at the moment looks like a double bottom using GMT 2 broker however that can change overnight (for me in Australia). Hope some of this is useful and would like to hear some criticisms and thoughts of how we can develop high probability trades with BB.

I didn’t want to make this too long but now I have. Another thought about the price moving to the outer BB’s. It can often mean there is potential for further movement upward/downward. If you look back to May on the 4 hour GU chart you can see how price moved up the outer band and was closing outside. Note the retracements stayed within the double BB channel. I was watching a video somewhere (If I can remember where I will let you know) and the presenter called it ‘walking the line’ or something to that effect. When price hits the outer band or pierces it, it could mean a strong move in that direction and not a reversal. This is where the shape of the band could be helpful to detect or alert you of a possible reversal & wait until price closes inside the channel after going through the inner BB. I expect monthly chart will close in the channel since it is substantially through that inner BB now however things can change.

Good Luck S1L1KON if you can master the direction of the trend maybe you can earn while you sleep. Once you have trend direction I would imagine you could make some good trades through your daytime as well.

S1L1K0N · June 28, 2011, 4:55pm

During the day when New York is open I’m busy at work and don’t have time to check the charts. The only time I can really look and focus on them is in the late afternoon and evening (during the relatively dead Asia/Pacific period); so a trading system based on longer time frames (4 hr, daily, etc) is what I’m looking at. I’ve tried the 15min and 1hr periods with various systems, and while I had a little bit of success it was too hard to try and catch the EU/London open and I was too busy to deal the the EU/London/New York overlap.

Starlo · June 28, 2011, 6:41pm

I;m going to look into this in detail.

monstapips · June 28, 2011, 11:34pm

Mary J,

I took a look at the monthly chart and using your parameters, I can see that there was a signal to go short a couple months back (in April). It does look like that it was a top and now, the pair has dropped more than 500 pips! It’s approaching the middle of the bollinger bands (orange line). Were you able to catch that?

I do have some questions though. Here’s a monthly chart of GU.

Looking back in 1998 to 2004, there were a lot of signals (on the monthly chart), indicating potential tops and bottoms. However, it was pretty choppy at those times and if you kept trying to short in 2002 and 2003, I do think you would have taken a hit. What do you do during these periods?

My other question is, when you zoom in to the one hour, do you use the same parameters? (20 / SD 1.5 and 2)? Also, by retracement, do you mean a retracement back into the SD 1.5 and SD 2.0 region? Lastly, do you take profit strictly once price hits the middle of the band range (orange line)?

Interesting point your bring up about the “walking the line”. I know that is another way to look at bollinger bands. Perhaps there’s a way I can incorporate that into the system.

MaryJ · June 29, 2011, 8:08am

Will try to answer your questions Monstapips.

I took a look at the monthly chart and using your parameters, I can see that there was a signal to go short a couple months back (in April). It does look like that it was a top and now, the pair has dropped more than 500 pips! It’s approaching the middle of the bollinger bands (orange line). Were you able to catch that?

It turned out it was a top and I wasn’t looking at BB’s at that stage. I do have difficulty in determining tops/bottoms. I think you have to find the highest time frame that makes sense to you then once you know trend direction find a lower time frame to get in.

Now since you have provoked me into thinking about how to handle it I would suggest switching to the weekly and Daily to see what was happening after monthly closed through inner BB & outer BB appeared to be resisting it at beginning of new month.

Take a look at the daily chart(below) showing how it consolidated at the second vertical line. First vertical line is 1st April and 2nd vertical line at 29th April 2011 which was the last trading day in April. 2nd May was in a downtrend & 3rd May closed inside the inner channel which could be a good opportunity to enter a short. It really depends on how aggressive a trader you are.

Interesting that on the 11th May there was a huge spike up (seems to be a resistance there) so you may have been stopped out depending where your stop loss was. By getting in on Daily chart we can get in almost at the reversal whereas if we waited a whole month to see that it was in fact a reversal we would have lost of lot time and pips. By observing monthly chart you would see that it was not attempting to go higher than the previous month which should improve confidence that a reversal is occurring.

Sorry I don’t know how to attach it as a picture.

MaryJ · June 29, 2011, 8:45am

Looking back in 1998 to 2004, there were a lot of signals (on the monthly chart), indicating potential tops and bottoms. However, it was pretty choppy at those times and if you kept trying to short in 2002 and 2003, I do think you would have taken a hit. What do you do during these periods?

You could have traded down from 1998 to 2001 then up from the major reversal. It is a matter of getting in at right time. (Based on the fact you are staying long term in the trade) See chart below – looks easy in hindsight:

Coloured lines are stop losses
An article explaining ‘Riding the Bands’ Bollinger Bands, Trading Bollinger Bands & Bollinger Bands Explained - The Bollinger Bands Strategy | The Digital Investor
there are two short video’s ¾ way down page

MaryJ · June 29, 2011, 9:16am

My other question is, when you zoom in to the one hour, do you use the same parameters? (20 / SD 1.5 and 2)?

I have changed my SD settings to 1.0 and 1.5. I would still leave the SD settings the same but that is my preference. Needs to be something you feel comfortable with.

Also, by retracement, do you mean a retracement back into the SD 1.5 and SD 2.0 region?

YES – it sometimes moves into inner channel & back to outer BB again. Really depends on how strong the retracement is and if you move SL with the last high (for short) & low(for long) the retracements mostly will not hit the Stop Loss if it is in a good trend. The retracements would be a useful place to enter trade if you missed the first one.

Just in case you are asking what a retracement is - basically after a move up (or down) it will pull back before continuing up again. It depends on your method as to where you might get in after a retracement has occured. Retracements are great places to add more trades.

Lastly, do you take profit strictly once price hits the middle of the band range (orange line)?

That’s a good question. There may be resistance at the centre line and is it determined that the overall monthly is in a down trend or has it reversed? If I had gone short at or near the top then I might risk it and have a stop loss at least at break even. This way there will be no loss if it does go up. If it doesn’t you stand to make huge profits.

Here’s another point of interest. Put a horizontal line against the body of the lowest candlestick at the last lowest Low of the monthly chart. Then scroll back and see what has happened in the past. My chart goes back to 1990 and there is a total of 3 touches. A resistance level?

Zoom out your chart and you can see it there. If it follows the previous cycle it will continue down some more yet but notice the last top was higher than the previous high. Does that mean the bottom of this last move down will not be as low as the previous?

If my memory serves me well the last two monthly candlesticks indicate a reversal has happened going by James 16 method – it is called a double bar high with a lower close. I think the two matching tops must be within 2 pips of each other otherwise the signal is not valid. I am not sure if that relates to ‘monthly charts’ .

james16 Chart Thread - Page 2 @ Forex Factory

If you click on the chart from the link above it will enlarge and you can see the information there – with bands but I think they are keltner bands. The very top chart on that page and the very top hilighted bars are similar to what we are presently seeing with the GU Monthly chart.

His information is like ‘gold’. Start from page one if you really want to learn about what the candlesticks are telling us. I need a refresher myself.

Nothing is fully predictable in forex but it will be interesting to find out!

S1L1K0N · June 29, 2011, 10:57am

I’ve taken two trades on my demo account with this system this week. One closed sometime this morning (Sell USD/CAD) for a gain of 61 pips. There’s currently an open trade on (Sell USD/JPY) in the black 25 pips.

MaryJ · June 29, 2011, 7:47pm

[I]If my memory serves me well the last two monthly candlesticks indicate a reversal has happened going by James 16 method – [B]it is called a double bar high with a lower close[/B]. I think the two matching tops must be within 2 pips of each other otherwise the signal is not valid. I am not sure if that relates to ‘monthly charts’ .[/I]