A Simple Bollinger Band Strategy

There's a new article on Investopedia titled, "Tales From The Trenches: A Simple Bollinger Band Strategy."  It's a simple strategy, one in which you buy when the daily candle closes below the lower band and sell when the daily candle closes above the upper band.  The strategy looks for the price to make it's way back to the middle line which is just a 20 period SMA.  There is nothing new about this strategy but it's simple and he does acknowledge its faults which every strategy has.  That is where money management comes in.

http://www.investopedia.com/articles/trading/07/bollinger.asp

The MACD Is Overrated

I read a pretty enlightening article on the MACD today and how this indicator has been elevated to mystical status.  Is this deserving?  According to the author, no.  The MACD is an indicator based on moving averages; that's it.  "In the end, the performance of moving averages and indicators based on moving averages will always be, well, average." I personally use the MACD and I'll admit that I've been guilty of elevating this indicator to mystical status as well.  I predominantly use it to identify divergence between price, but I also use it to identify momentum.  

I've talked in the past about my avoidance of lagging indicators and the author of this article says that if this is the route that you want to go (I do), then here is what your toolbox should and should not be.

Your toolbox if you want to perform technical analysis in a lagging manner:

1. Moving averages
2. MACD
3. Stochastics
4. Parabolic SARs
5. Bollinger Bands 

Your toolbox if you want to know where price "is likely to go next… as often as 80% of the time."

1. Trendlines
2. Pivot Points
3. Candlestick

This article presents far from revolutionary information but it goes against from the norm and states why you would be best served by using something other than the MACD.   That is why I like this article.  There are just so many articles on how to use the MACD to your advantage.  

The author also mentions some candlestick patterns (hammer, star) that when identifying them when price is near pivot points or trend lines, can be more powerful.

Article: http://www.investopedia.com/articles/trading/06/AgainstMACD.asp

Inside Day Bollinger Band Turn Trade

There's a new forex article on Investopedia titled, "Inside Day Bollinger Band Turn Trade" by Jamie Saettele.  I don't know much about the author except that a lot of his articles involve trading systems.  It's a good read because it shows how simple it can be to develop a system that could potentially be your money maker.   I remember a Rob Booker seminar where he said that if you put yourself in a room long enough, you can make a trading system out of anything.  This is absolutely true.  The question is whether this system can be profitable or not.  That would all depend on your rules, expectations, money management and a whole lot of other things but it is possible.

Read the article at http://www.investopedia.com/articles/forex/06/BBInsideDay.asp

Forex Open Orders and Bollinger Bands

I placed several orders last night looking for a break of the 60 pip channel in the EUR/USD and USD/CHF but neither were triggered.  I have since removed those orders and will continue to scan the market looking for setups.  Volatility is weak and I don’t see any point in entering the market until these conditions change.  If anything, you have to expect some more volatility after new Fed Chairman Bernanke gives his semiannual monetary policy testimony to House Financial Services Committee Wednesday morning.

I have not had a chance to test my newest setup strategy due to the low volume.  I noticed 2 possible setups last night in Yen crosses but the setup conditions were never met.  This setup strategy involves Keltner channels, exponential moving averages, momentum indicators, and velocity indicators.  I’ll give more details once I’ve had more time to test it. 

I’ve just started using a custom indicator called Velocity.  It performs similar to the Squeeze which was developed by John Bollinger.   Here is a brief description of the Squeeze:

Bollinger Bands employ upper and lower standard deviation bands together with a center simple moving average band around price to identify high and low volatility points. While it can be a real challenge to forecast future prices and price cycles, volatility changes and cycles are relatively easy to identify. This is because equities alternate between periods of low volatility, followed by periods of high volatility, and so on – much like the calm before the storm and the inevitable inactivity afterward. 

Quite simply, when the bands are far apart, volatility is high and when close together, volatility is low.  What we’re looking for is for the bands to be close together and as they begin to separate more, the explosion of volatility and a subsequent breakout.

I find that the velocity indicator is more responsive to impending volatility.  Instead of using standard deviation like the Squeeze, velocity uses weighted moving averages.

What is the Squeeze

Before I get into what "the Squeeze" is, I want to thank everyone that has sent positive comments about the website. (I’d equally appreciate negative comments as well)  I’m glad it has been able to help you in your quest to become a Forex trader.  In addition, the visitor traffic to the site has been improving by the day which motivates me more to post worthwhile content.

The Squeeze is actually a pretty cool setup that can be used for both day trading and swing trading.  Some of you may have already heard about it from John Carter’s website, "Trade the Markets." The Squeeze particularly takes advantage of quiet periods in the market when volatility has decreased.

John Carter has turned The Squeeze into an indicator but it isn’t free.  You can create the indicator yourself if you have Bollinger Bands, Keltner Channels, and any momentum index oscillator.   The real disadvantage is that you have increased the number of indicators on your charts and if anyone has seen a Keltner Channel before, it’s not easy on the eyes.  Whereas Bollinger Bands are smooth, the Keltner Channel is jagged.  You can use the default setting for both of these indicators and a 12-period for your momentum oscillator.  The oscillator is used to indicate whether you will go long or short.  [Continue reading by clicking Read More]

[Read more]

Week 4 Performance Review

Yet another week with low volume where we see Friday prices positioned at the low or high for the week with the advantage going to the USD:

Ranges for the week

EUR/USD: 1.1778-1.1931 (currently 1.1788)
GBP/USD: 1.7129-1.7408 (currently 1.7189)
USD/CHF: 1.3050-1.3197 (currently 1.3182)
USD/JPY: 116.17-118.16 (currently 117.84) 

Week 4 was another losing week for me (-15 pips, -$242, 4 winning trades, 6 losing trades)

After 4 weeks of trading, I’m still up 123 pips and $1100.  If I were trading full-time, the $1100 wouldn’t be enough to cover a majority of my expenses this month and I’d probably be homeless.  That is why I’m holding on to my full-time job for now until I can see consistent returns.

This week my charts got "fatter" as I added more indicators and moving averages. 

In week 1 and 2, I was in "Raghee Horner" mode and my charts only had the wave and MACD indicators.   Weeks 1 and 2 just so happened to be my most profitable.  I wasn’t comfortable with just going through the motions of using only her strategy so in weeks 3 and 4, I’ve been experimenting more with EMA’s (8,21,50,100,200), CCI (Thanks Andrei), candlestick patterns, and other indicators like momentum, stochastics, RSI, and bollinger bands.  Weeks 3 and 4 might have been a good week to take a sabbatical to just watch the charts and train my eye to spot patterns as they emerge as Andrei mentioned in one of his helpful comments this week.

In the meantime, I’m reading a lot and trying to learn as much as possible.  I followed others advice and picked up a copy of "Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude."  I’ve also been lightly reading, "The Candlestick Course" by Steve Nison and "Day Trading the Currency Market" by Kathy Lien.  Lien’s book is much better than I thought and has given me additional insight into the market that I otherwise would have missed.

Happy New Year!