Bollinger bands backtesting

As the creator of the system suggests, I used the Bollinger bands (20, 2) and MACD (12, 26, 9) indicators in my study. Since it’s primarily based on the daily chart, I decided to backtest the system over the past six years, from to

Comment Name Email Website Subscribe to the mailing list. BB 20, 2 Upper Band Penetrated. It is important to remember that when the price touches the upper band that does not robotically mean to sell. Let's look at the period of December 22, ,to December 27,

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Bollinger Bands - Technical Analysis from A to Z Bollinger Bands are similar to moving average envelopes. The basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices.

Awesome Oscillator is a great tool to check the strength of the trends. Awesome Oscillator is the histogram with the slopes crossing the zero level, turning red or green according to the strength of the Bullish or Bearish trend. As well as the Bollinger Bands, there are 3 different options to trade the Awesome Oscillator, but for this particular strategy we use the next way to trade it:. However, feel free to try different options, because their diversity open up new backtesting and trading opportunities.

Then with simple math calculations, we can make conclusions about effectiveness or irrelevance of the chosen strategy. The full version of the theory of our backtesting experiments and how did we came up with the idea of such backtesting you can read here. Unfortunately, within the given setting, timeframe and the listed above rules the strategy turn out to be a disappointment. As expected, the most unpredictable performance was during the Flat markets — as this kind of strategy is based on the trend trading during the ranging markets this pair of indicators can provide the trader with the false signals.

Should a trader discard it? Please, take into the account that our floating spread is set to 1. Do not forget that the size of the spread matters and the larger it is, the bigger should be the profits to cover it up.

As you can see, adjust, test and then change accordingly — is the only possible way to find the options suitable for YOU. There are dozens of the ways to trade the indicator alone or with the combinations with other ones. We show only one way to trade, however, nothing should stop the curious minds to try different settings and check how it can influence the final results.

As you can see, backtesting is quite simple activity in case if you have the right backtesting tools. The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program. In addition, you will receive 17 years of free historical data easily downloadable straight from the software. Share your opinion if you have tried this combo of the indicators before and what were the results. Forex Tester is a software that simulates trading in the Forex market, so you can learn how to trade profitably, create, test and refine your strategy for manual and automatic trading.

Forex historical data is a must for back testing and trading. The maximum number of open positions is capped at 10 with equal weighting position size i.

As you can see, the annualised return when traded as portfolio is not particularly strong at 5. However, one worrying feature is that the system has basically flat-lined since This ensures we can trade on the close and not have to wait for the next open. It is always good to look over old materials to find interesting strategies that you can test on unseen data. In this article, we found an interesting Bollinger Bands strategy that worked pretty well on our selection of ETFs and stocks and shows a fairly high win rate.

Although it hit a bad patch after , this system has some good characteristics and could be worth investigating further. Simulations and charts in this article produced with Amibroker using historical data from Norgate. For more interesting trading systems, please check out our Research program.

Then you'll love some of the free extras I've put together. Just enter your email address below to download and stay alerted to new content.

You can unsubscribe at any time. I just tried it and the results improve significantly. To be honest was just Your idea. I had read recently your Free Trading System rules page. Sorry for the confusion but the equity curve is a function of the position size. The equity level is therefore misleading but I showed it so we can see a timeline of profits.

The return when risk-adjusted is actually good and I will update the article to reflect this. This could be an interesting starting point! Thanks for sharing that JB. The key to this strategy is waiting on a test of the mid-line before entering the position.

You can increase your likelihood of placing a winning trade if you go in the direction of the primary trend and there is a sizable amount of volatility. As you can see in the above example, notice how the stock had a sharp run-up, only to pull back to the mid-line.

You would want to enter the position after the failed attempt to break to the downside. You can then sell the position on a test of the upper band. If you have an appetite for risk, you can ride the bands to determine where to exit the position.

This is honestly my favorite of the strategies. If I gave you any other indication that I preferred one of the other signals, forget whatever I said earlier. First, you need to find a stock that is stuck in a trading range. The greater the range, the better.

Now, looking at this chart, I feel a sense of boredom coming over me. However, from my experience, the guys that take money out of the market when it presents itself, are the ones sitting with a big pile of cash at the end of the day. In the above example, you just buy when a stock tests the low end of its range and the lower band. Conversely, you sell when the stock tests the high of the range and the upper band. The key to this strategy is a stock having a clearly defined trading range.

This way you are not trading the bands blindly but are using the bands to gauge when a stock has gone too far. You could argue that you don't need the bands to execute this strategy.

However, by having the bands, you can validate that a security is in a flat or low volatility phase, by reviewing the look and feel of the bands. So, instead of trying to win big, you just play the range and collect all your pennies on each price swing of the stock.

Like anything else in the market, there are no guarantees. Bollinger Bands can be a great tool for identifying volatility in a security, but it can also prove to be a nightmare when it comes to newbie traders.

Don't skip ahead, but I will touch on this from my personal experience a little later in this article. Not exiting your trade can almost prove disastrous as three of the aforementioned strategies are trying to capture the benefits of a volatility spike.

For example, imagine you are short a stock that reverses back to the highs and begins riding the bands. What would you do? While bands do a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man's failed attempt to control the uncontrollable.

While there is still more content for you to consume, please remember one thing - you must have stopped in place! Let me help you out if you are confused - kill the trade! While bandsdo a great job of encapsulating price movement, it only takes one extremely volatile stock to show you the bands are nothing more than man's failed attempt to control the uncontrollable. Strategy 5 - Snap back to mthe iddle band, will work in very strong markets.

I have been a breakout trader for years and let me tell you that most breakouts fail. Not to say pullbacks are without their own issues, but you at least minimize your risk by not buying at the top. Shifting gears to strategy 6 - Trade Inside the Bands, this approach will work well in sideways markets. Because you are not asking much from the market in terms of price movement.

From my personal experience of placing thousands of trades, the more profit you search for in the market, the less likely you will be right.

Don't worry, I'm not about to go on a history lesson on cryptocurrencies with details of where David Chaum went to college. I was reading an article on Forbes, and it highlighted 6 volatile swings of bitcoin starting from November through March So, I wanted to do my own research and I looked at the most recent price swings of Bitcoin in the Tradingsim platform. Let's look at the period of December 22, ,to December 27, During this period, Bitcoin ran from a low of 12, to a high of 16, Let's unpack this a little further.

Do you realize that these gains were largely made over 3 days' worth of trading? I am getting a little older now and hopefully a little wiser and that kind of money that fast, I have learned is almost impossible for me to grasp. The psychological warfare of the highs and the lows become unmanageable. So, it got me thinking, would applying bands to a chart of bitcoin futures have helped with making the right trade? I indicated on the chart where bitcoin closed outside of the bands as a possible turning point for both the rally and the selloff.

But let's be honest here, this is a minute chart of a highly volatile security. You must honestly ask yourself will you have the discipline to make split second decisions to time this trade, just right?

The one thing the bands manages to do as promised is contain the price action, even on something as wild as bitcoin. I honestly find it hard to determine when bitcoin is going to take a turn looking at the bands. It's not that the bands are doing anything wrong or not working.

Bitcoin is just illustrating the harsh reality when trading volatile cryptocurrencies that there is no room for error. I personally do not trade bitcoin, but after looking at the most recent price swing using bands a couple of things come to mind:.

Pairing the Bollinger Band width indicator with Bollinger Bands is like combining the perfect red wine and meat combo you can find. In the previous section, we talked about staying away from changing the settings.

Well, if you really think about it, your entire reasoning for changing the settings in the first place is in hopes of identifying how a security is likely to move based on its volatility.

A much easier way of doing this is to use the Bollinger Bands width. In short, the BB width indicator measures the spread of the bands to the moving average to gauge the volatility of a stock. Well, now you have an actual reading of the volatility of a security, you can then look back over months or years to see if there are any repeatable patterns of how price reacts when it hits extremes.

Still, don't believe me? Look at the below screenshot using both the Bollinger Bands and Bollinger Band width. Notice how the Bollinger Band width tested the. The other point of note is that on each prior test, the high of the indicator made a new high, which implied the volatility was expanding after each quiet period.

As a trader, you need to separate the idea of a low reading with the Bollinger Bands width indicator with the decrease in price. If you had just looked at the bands, it would be nearly impossible to know that a pending move was coming. You would have no way of knowing that.

This is just another example of why it's important to pair Bollinger Bands with other indicators and not use it as a standalone tool. The above chart is of the E-Mini Futures. I want to dig into the E-Mini because the rule of thumb is that the smart money will move the futures market which in turn driveS the cash market. Looking at the chart of the E-mini futures, the peak candle was completely inside of the bands. Other than the fact the E-mini was riding the bands for months, how would you have known there was a big break coming?

Now that I have built up tremendous anticipation, let's see if there is a way to identify an edge. Remember in Chapter 4, the Bollinger Band width can give an early indication of a pending move as volatility increases.

In the above example, the volatility of the E-Mini had two breakouts prior to price peaking. If that wasn't enough to convince you, then the second break above the 8-month swing high of the Bollinger Band width was your second sign. After these early indications, the price went on to make a sharp move lower and the Bollinger Band width value spiked.

The inspiration for this section is from the movie Teenage Mutant Ninja Turtles, where Michelangelo gets super excited about a slice of pizza and compares it to a funny video of a cat playing chopsticks with chopsticks.

Does anything jump out that would lead you to believe an expanse in volatility is likely to occur?

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