Note: The method essentially remains the same but some of the settings have changed along the way. Read this and all the posts to get an understanding of the method but use the current settings as at the bottom of this post.
trading with the trend (using MA crossovers for entry, searching for early signals/finetuned entry on the 15min chart, using bounces off the MAs as support/resistance)
support and resistance (lines, trendlines, and moving averages)
[B]Excerpt from:[/B]
[U][B]Alan S Farley /B - [I]The Master Swing Trader[/I] - McGraw-Hill[/U]
(note this book is more aimed at swing trading the stocks but some methods apply equally well to forex).
Swing traders must investigate central tendency in every promising opportunity. Market action should spring back toward a centre of gravity after extending in either direction. This axis tends to support price from below and resist it from above during active markets. In flat rangebound periods, price action commonly oscillates back and forth across the pivot until volatility triggers a new directional impulse.
BBs focus analysis of central tendency in real time. To use the bands effectively, apply a central moving average that tunes into the expected holding period…
Also see: Bollinger Band Tactics by Alan Farley
Simple band concepts:
Location and direction determining trend phase:
Upper vs lower action: location of price determines the strength of the current phase. Price within the upper band (BBs have 3 bands dividing it into 2 halves) signifies power while price within the lower band signals weakness.
Price direction: direction of price within the band identifies convergence-divergence with the current trend, eg price moving up but in lower segment of the band signifies divergence, price moving down in the lower segment of the BBS signifies convergence ([I]discussed on this post: Post[/I]).
Trend testing: the lower, centre, and upper bands represent S/R for the trend. Reversal off any band increases odds that price will expand in the reversed direction and return to the last band crossed or touched.
Penetration through the centre band increases directional momentum:
Crossing from below centre to above: uptrend increase in strength. observe directional movement of the upper band as price approaches.
crossing from above centre to below: downtrend increase in strength.
Bands open in response to awakening trend:
Climbing the ladder: if the angle of the upper band rises in response to approaching price, expect a series of upward price bars, uptrend in progress.
The slippery slope: if the angle of the lower band falls in response to approaching price, expect a series of downward price bars, downtrend in progress.
Bands flatten in response to easing trend:
Head in ceiling: if the angle of the upper band flattens in response to approaching price, expect price bars to pierce the band and reverse.
Foot in floor: if the angle of the lower band flattens in response to approaching price, expect price bar to pierce the band and reverse. This will likely end a downward swing and start an upward one but watch if price pulls back slowly while the band then opens. This will signal an impending breakdown.
[B]Trade management:[/B]
Stop losses on the counter trend trade - move to breakeven after 25 pips particularly on the counter trend trading but this is up to you personally.
Stop losses on the trend trading - opposing bollinger or candle wick.
Target is the middle bollinger on counter trend trading.
Target is until a significant S/R zone or until the MAs cross back over in the opposite direction.
Probably no need to trade the trend and a counter trend trade, just 1 or the other depending on the setup.
[B]Trading times:[/B]
Potentially any high liquidity sessions but prefer London - NYSE session
[B]Inherent problems with MA indicators:[/B]
Whipsaws - the MAs are primarily used for trend trading on the 1hr chart. If price is ranging you are going to get whipsawed in and out of trades. This is why we use the bollingers to give us an indication of probable price. If price is ranging, then we can use the counter trend trading instead and look for “Head in Ceiling” or “Foot in Floor” trades.
Lag on longer term MAs - all MAs have a built in lag but these settings should be good enough for intraday trading.
Whipsaws on the counter trend trade - entering a counter trend trade from the bollinger edge and wick candle only to be caught in a continuation of the trend.
The standard setting for bollingers is 2 std deviations - if you want you can wrap a few bollinger bands around it or fine tune to your chosen pair but should see price rarely hit the 3 std deviation bollinger.
Ultimate price movement will depend on all S/R boundaries and not just those associated with BBs.
As an example of trading the ma’s, using the 1h GU chart with a 2 & 4 LWMA I’ll give you my trade for today as an example.
I entered a trade at 1.650 (the 2 & 4 LWMA cross) this morning at 07:00 EST (12:00 GMT my time) and rode it up to 1.662 (thats 100 plus pips in one trade). I bailed out when I saw that wick start to appear on the third hour candle.
That wick brings me to the second part of this thread. The riskier counter trade against the trend. Now if I had entered this trade after the first wick (outside of the upper bollinger in this case) after waiting for a candle colour change and traded towards the centreline bollinger. It would have been good for another 50 plus pips.
I think its important to stress that both these trades depend in large part on there being volume in the market. I have found that outside of London open - New York close. The above strategies are not as productive.
Great start SanMiguel and I look forward to hearing from many others on this topic.
There are quite a few different types of MA as i’m sure your aware. Without going into the mathamatical formulas here, I like the LWMA because its quicker than most in pointing out a change of direction in price. Trading MA’s is all about catching as much of the average price movement as possible in pip terms.
If you overlay a 7&14 EMA on a 15m GU chart. Then a 7&14 LWMA. You will quickly see that EMA is very slow in comparison to LWMA.
Are we looking for a change of colour on the next candle or just an indecision candle like a hanging man, spinning top, etc. that has exceeded the wick by a reasonable amount? When do you bring the 15min chart into this? For example, if we had traded after the close of the red candle as a short, it would have been a loser. Obviously markets were a bit volatile today but that aside…
I should point out that in this instance I didn’t counter trade this signal. I was more than happy with my first and only trade today.
Using your chart I would have waited until your circled geen hour candle wicked outside of the bollinger indicating overbought. Then waited for a subsequent change of colour candle and entered a short. In this case. It was the ‘classic’ signal, a double wick (a double test of resistance) and change of colour candle. Often on the 1h chart you will only get one candlewick then a subsequent candle colour change indicating a change of direction in price.
Because there was so much volume in the upward movement, it was only necessary to follow the 1h chart. However, I always keep a 15m chart open to fine tune entry/ exits on the 1h.
Would you have waited for the red candle to close or enter as soon as the green candle had closed?
I’m just trying to update post 2 with some basic details of trade management. What do you use as stops? Personally for the counter trades, which I find more risky I would also add a move to break even after 20pips.
On the trend trading ones, I might add a stop at the bottom bollinger for a long, etc.
I should be more precise here. After the first wick candle outside of the bollinger. I would wait until the next candle that had changed colour. In this instance it was the second candle on the hour chart. It tested resistance a socond time but fell back for a second wick. As soon as this second candle changed colour on the main body of the candle, I would have entered a short. How long to stay in a counter trend trade is another issue.
When entering any trade I look to the previous high or low (usually a wick) and place my stop just outside of this. I like to manually move my stop inside the trade as soon as is practicle. This largely depends on how fast price is moving and what size the retraces are. I then move the stop up/ down the trade as it progresses in line with the above movement.
The interesting thing here so far is where assuming that when price breaks outside the bollinger and wicks its a counter trade against the trend? Take a look at yesterday on the 1h chart and you will note that when price stepped outside the bollinger and wicked it signalled a change of trend on the 1h chart.
Yes, that’s true but I guess you’d have to hold it through crossing over the centre band but if it moved quickly then that would be doable. Will post a few charts over the coming days
What do ou mean by double wick? Is this where both wicks of the same candle appear outside the band?
Does the candle that wick outside the band also have to close outside the band or do you trade when the candle wicks outside and then the same candle closes inside the band?
By entering on the colour change of a subsequent candle, is there a high likelihood of the candle reverting back to the wicking candle colour, ie in the eg. provided by San Miguel, the green candle wicks outside, enter on subsequent candle going red but same candle later goes green?
The double wick refers to in this case the two 1h candles with upper wicks.
The first candle in SanMiguels chart (ringed) wicks. The second 1h candle also wicks. Basically what this represents is there was a breakout of the upper bollinger by a strong move up that ran out of steam when it hit resistance and retraced. Then there was another run at resistance by the second candle that also could not break resistance and retraced. This is a very strong indication that having faild twice to break up, price will now track down.
Had I entered that trade it would have been when the second candlewick just changed into a full bodied candle with a different colour. Exactly where this occured is of no real importance.
There are of course no absolutes. But generally when price steps outside of the 1h bollinger and wicks, look to the next candle for a possible trade. Try looking back over a week or so of GU on the 1h and you’ll get a feel of what I mean. Its not always ‘two wicks’ but this is a textbook indication. Sometimes theres just one wick. But one wick or several, its almost always a signal of a retrace of a bigger or lessor degree to come.
If you do look back you’ll see it works best when price is not climbing the side of a bollinger band i.e. when price is not strongly ranging.
Does the length of the wick determine the likelihood of a successful counter trade? I assume the longer the wick means there’s been a strong rejection of the move outside the bollinger?
Following your advice, I’ve looked at the past week’s 1HR GU and can see a few occasions where the candles hug the upper or lower band which I assume is what you mean by climbing the side of the band. Whats the best way of identifying this or is it simply a case of letting your stop loss do what its supposed to? eg on 04/09, the 8am GMT candle is bullish and wicks outside the upper band. The 9am candle also wicks and is bearish so I assume you would enter at this point but the next two candles hug the upper band. The 12pm GMT candle does eventually close between the centre and lower band but not before a very long wick outside the upper band (which would trigger any stop loss presumably if it hadn’t already have been triggered!)
I dont know but looking at my chart might you be confusing EST with GMT? The only candle with a largish wick outside of the bollinger on 04/09 is the bearish candle at 08:00 EST. This candle unfortunately didnt follow this strategy in that it wicked outside of the upper bollinger and continued down all on the same 1h candle. However using the MA’s even on the 1h you would have had an indication that price was falling when the candle wicked and changed to a full bodied candle. I would expect that the 15m chart ma’s would have given an even earlier indication.
The second 1h candle (09:00 EST) did follow the strategy in that it broke the lower bollinger and wicked. The second 1h candle (10:00 EST) changed colour. Enter a long trade. In this case price continued through the centre bollinger and past the upper bollinger (75 - 100 pips).
Yes the big wick is indicative of a strong rejection. SanMiguel will doubtless be back testing this (one of the best in this site). He already suspects that around a 50% wick looks the most favourable.
As to price hugging the bollinger band wall, yes when this happens it not adviseable to use this system. But hopefully you would have already entered on the ma’s and this price hugging would be to your advantage.
I’m definitely using GMT as I’m using IBFX for charting purposes and I’m reliably informed that it is GMT
I’ve attached a screenshot so you can see what I mean about the bullish 0800GMT candle wicking followed by bearish wicking candle so presumably you would have counter trend at this point? Then there are the subsequent bullish and bearish candles hugging the upper band before the long wicker at 1200GMT (which of course if 0800EST!)
I use IBFX for charting also and it is GMT. So on this example the 7, 8, 9, 10, 11, and 12 hour candles each have a wick above the upper bollinger.
would you not go short on the 9hour candle because it is a change of color?
or the 11hour because it is a change of color?
if you go short on the 11hour candle then the 12hour one has the longest wick up which may or may not have taken out your stop but would have been profitable on the down move.
Also the 16,17 and 18:00 candles have wicks above the upper bollinger, then the 19:00 is a different color so would you go short on that one.
for each of these… why or why not?
It’s easy to see the validity of the 13:00 and 14:00 candles on the bottom bollinger, but the ones on the upper… I dunno…
Here, we have a successful short counter trade for 25 pips. Ideally I would have liked to see the big red candle get a bit further out of the band, say 50% or so.
Looks like a head in ceiling as the bollinger bands were starting to flatten. However, was being careful because of the S/R line (marked red A). The S/R line was also the centre of the bollinger so when price looked like having difficulty getting past that and some green candles appeared on the 15min, I closed the trade out. It might go further but happy with +25 for the moment (5min trade).
