The Bollinger Sky Walker System

Trading Systems Free Forex Trading Systems
1

hi everybody.

Check out this mechanical trading system I came up with using Bollinger bands and the MACD indicator. I use it to spot the beginning of strong moves, taking advantage of a rise volatility. It’s a longer term system that is based on the daily chart, so there are few signals but once you catch one, there’s a good chance that you’ll get a lot of pips! Here are the details:

Indicators:
Bollinger bands (20, 2)
MACD (12, 26, 9)

Entry signals:
Long: If a candle closes above the Bollinger bands and MACD is showing upward momentum, buy at the open of the next candle.

Short: If a candle closes below the Bollinger bands and MACD is showing downward momentum, short at the open of the next candle.

Stops:

For my stop, I calculate it based on the size of the body of the breakout candle and add 20 pips.

Take profit

I don’t have a set profit target. I let my position run, adjusting my stop by the size of my stop whenever price moves in the direction of my trade. For example, if my stop is 100 pips, once I am up 100 pips, I move my stop to breakeven. Once I am up 200 pips, I move my stop to the 100 pip mark. So on and so forth.

Here’s an example below of a winning trade.

The size of the body of the breakout candle is 173 pips. So for this trade, the stop would be 193 pips.

audusd_bol_walk_example1.jpg700×525 52.4 KB

As you can see, there was a strong move down and if I had sold on the signal, I would have made 771 pips! That’s about a 4 to 1 return to my initial risk of 193 pips.

Here’s another chart example but, in this case, the stop got hit right away.

audusd_bol_walk_example2.jpg700×525 50.2 KB

Unfortunately for this one, price did not continue lower, and after a few days, the position got stopped out.

I’m thinking of adding ADX to the mix to help filter out false signals like these, but I seem to be missing out a bunch of good trades with an additional indicator. Or maybe I should just adjust the settings of ADX. What do you guys think? I used ADX (20).

2

It’s a moving average cross and you don’t take support and resistance into account and neither much price action, and you are using the dreaded MACD, adding another indicator will not filter out trades it will just add to the confusion, sorry I’m not positive about it, but that’s the way I see it.

3

From my expierience with bollinger bands the price often pulls back after breaking the outer bands as it indicates a strong sudden price movement which is often unsustainable, but again this isn’t a golden rule. However if the price can break the bounce created after the initial BBand break, with downward momentum still pressent on the MCAD (see your first example) then you might be in a better position to enter the trade.

Personally I think the MCADs and BBands (and most indicators for that matter) are great at showing the strength of previous price movements, but don’t offer much on their own for future movement strength. Methods of purely waiting for indicators to tell you when to trade seldom work out in the long run, I abandoned the idea after finding that they worked just as often as they lost.

Not be to a total downer though, try combining these indicators to re-inforce the strength of moves through or off S&R levels and you will have much more joy. For example, if you break a previous resistance level after a prolonged period in the bearish portion of the BBand, combined with bearish MCAD momentum then it wouldn’t be unreasonable to assume strong selling pressure and thus a good time to short. But this is something you’ll have to test out yourself.

[I][B]edit:[/B][/I] Another point about BBands. In your first example you will notice a “squeeze” (contraction in the outer bands) just before the breakout which was not present in your second example. These squeeze often indicates a looming breakout, so figuring out S&R areas which you would like to see broken (to guage the strength of the breakout) indicates good positions to get into the trade. You might find that these are placed very close to where the squeeze is happening if the squeeze is tight, or could be a previously tested low/high. Just something to think about when using BBands.

4

I’m with purplepatch on this. Both are lagging indicators so not sure how you can spot “the beginning of a strong move” … more like the middle to end. Send us some results and you’ll unfortunately see this one providing negative returns in the long run.

5

Thanks for all the comments fellas! I’ll certainly take all of them into consideration and see what works.

@Shroomhead - i like your suggestion of using it in connection with S|R levels. I initially thought of this being a “mechanical” system where I would take it blindly, but now, I think if I used it as a semi-discretionary system, it might yield better results.

6

@purplepatch and mrchilled - What leading indicators would you suggest I use with system to help spot the beginning of a trend?

7

Beginnings of trends can be messy affairs as both sides duke it out to see who has the bigger clout. You might be better off waiting for a trend to develop and then enter on a pullback to support / resistance in the direction of the dominant bias. A stochastic could be used along with an entry trigger like a 1-2-3 for help identifying when the pullback is potentially complete and the trend is resuming again.

8

I don’t personally use any indicators, so can’t recommend any. I use price action candle stick patterns, pivot points and S&R.

9

Leading indicators don’t exist, if they did, everybody would use them, all you can do is work out best you can what is happening NOW! And for that purpose I use VSA, the trick is to work out if you have more buyers or more sellers at a particular price point, and it follows that if there are more buyers the price will go up and vice versa.

10

I agree, but also bear in mind that VSA or volume is not completely indicative of ALL FOREX volume but based on what your broker has available which in many cases can be used as a good proxy.

11

Oh yes, like such - http://www.purplepatchforex.co.uk/FxTraderVolumeArticle.pdf

12

what do you mean by “like a 1-2-3”?

13

Just curious but what brokers do you guys use? I am not familiar with using VSA.

14

Hi Pipballer,

To address the ADX question, I use ADX(14) to tell me if the current trend is strong to enter. I use the -DI and +DI to aid me.

I read an article which made the statement that an ADX of 25 or higher is an indication of a strong trend and an ADX < 25 is indicating a slowing trend.

I use my indicators with ADX so when I go long ADX +DI >25 is usually the trigger to get me into the trade. To exit the long trade, I add ADX -DI to the exit trigger. When it ADX +DI is < 25 or ADX -DI > 25 I close the trade. For a short trade it would look like this: Enter when other indicators are met and ADX -DI > 25. Exit short when ADX -DI < 25 or ADX +DI > 25.

I have found adding ADX to my system allowed me to stay in the trade longer but more importantly, get out when the trade reversed allowing me to minimize my loss or on those really good time, escape with a little profit.

Hope you find this useful.

Happy Trading!!

15

Interesting. I would be curious to see some rigorous backtesting.

This technique is pretty much the opposite of the way I trade. LOL.

The premise of my trading is that when Price Action reaches an extreme (i.e. pierces a Bollinger Band), it will retreat to the mean a good % of the time. That’s an over-simplification as I use other stuff to increase the probablity of success…but essentially…identifying predominant trend, wait for a retrace, enter after a extreme candle back with the big trend.

Oh…and paying close attention to S/R levels.

16

Hello pipballer. I like your method just as it is. You are taking advantage of momentum which occurs frequently in FOREX. Yes often price retreats to the mean but often this retreat is just a retracement in big mother trend. I wouldn’t add any more indicators. KISS. More indicators may filter out good trades as well as bad trades. They also will often give conflicting signals. Having said that, some backtesting would be interesting which robopip is gonna do. If it looks good I plan to use the strategy. It is somewhat similar to my method “trading the MACD” Check it out! Good luck and I’ll be following.

17

Check this out pipballer. Notice that when price pushes the upper band the MACD is above the zero line and when vice versa for pushing the lower band.

18

Maybe if you come up with a strategy for the retracements and add that in. Change your normal entry to an entry order at instead of market order at close +50. That way you are in position to jump on board which ever way the price action goes. If retrace then use small TP and if breakout, then use your normal strategy.

Just an idea. Will be watching this thread eagerly.

19

Thanks PPFX.

Thanks also to the OP for sharing your system.

20

Do you use a specific periodicity?