Bollinger bands plus moving average on BB%b

Master Class: Trading Strategies in Practice - Strategy 7

This trading tactic is based on the indicator "Bollinger Bands and BB%b". The latter displays the Bollinger Bands as 0, 0.5 and 1 levels, and the price as an indicator, but already under the chart.

If everything on the chart is dynamic and the price is moving with the bands up/down, in the indicator window everything is different: SMA20, from which the bands are drawn, is "stretched" in the indicator window and is the level 0.5, and the price is fluctuating around it; the upper and lower bands are levels 1 and 0 respectively. It is clear from here that the price, going beyond the bands, will go beyond the levels 1 and 0.

The signal to buy looks as follows:

First, we check the most important filter - EMA89. To enter to buy it must rise. Next, SMA20 from the price (Bollinger average) should also point upwards. The next trend direction filter is 30-period smoothed moving average on BB%bIt should also grow and be above the 0.5 level in the indicator window (blue line).

At uptrend the bottoms are taken for entry. Preferably, the price should enter below the SMA20 or even touch the lower Bollinger Bands. The indicator duplicates this signal, and its line falls below 0.5 or even below 0, forming a low as the end of the correction and the beginning of the next impulse wave.

Fig. 1. Rollbacks on the uptrend.

Mirror signals are used on downtrend.

Fig. 2. Rollbacks on the downtrend.

Importantso that all three trend directional filters show the same direction. On the bull trend: EMA89 from price is rising, SMA20 from price is rising, Smoothed MA 30 from BB%b is above 0.5 and rising. On a bearish trend, everything works in the mirror opposite direction.

Advantages of the strategy: In a trend, the opening of a deal takes place at the peak of the correction, entry into the next impulse wave. As a result, the deal does not hang in the negative for a long time. 

Flaws in the strategy: when entering a correction, there is a probability to get (if in profit) only on the wave B of the correction, which is directed in the same direction as the preceding trend. But, as a rule, moving 30 from BB%b, crossing 0.5, indicates the beginning of corrections or reversal, so trades at MA30 of BB%b directed against the trend are not recommended.

Figure 3. Correction and the role of MA30.