Masterclass: Trading Strategies in Practice – Strategy 7
This trading tactic is based on the indicator Bollinger Bands and BB%b. The latter displays Bollinger Bands as levels 0, 0.5, and 1, while the price is shown as an indicator below the chart.
When the chart is dynamic and the price moves with the bands up or down, the indicator window behaves differently: the SMA20, from which the bands are derived, is “stretched” in the indicator window and represents the 0.5 level, with the price oscillating around it; the upper and lower bands correspond to levels 1 and 0 respectively. Therefore, when the price moves beyond the bands, it also crosses levels 1 and 0.
Buy Signal Looks Like This:
First, check the main filter – the EMA89. For a buy entry, it must be rising. Next, the SMA20 of the price (the Bollinger middle band) should also be trending upwards. Another trend direction filter is the 30-period smoothed moving average on BB%b, which must also be rising and positioned above the 0.5 level in the indicator window (blue line).
In an uptrend, entries are taken at lows. Ideally, the price dips below the SMA20 or even touches the lower Bollinger Band. The indicator confirms this signal when its line drops below 0.5 or even below 0, forming a low that marks the end of a correction and the start of the next impulse wave.
Fig. 1. Pullbacks in an uptrend.
Mirror signals apply for a downtrend.
Fig. 2. Pullbacks in a downtrend.
It is important that all three trend direction filters align. In a bullish trend: EMA89 of price rises, SMA20 of price rises, and the Smoothed MA30 on BB%b is above 0.5 and rising. In a bearish trend, all these work in the opposite direction.
Advantages of the strategy: Trades are opened at the peak of corrections within the trend, entering the next impulse wave. This minimizes the time trades spend in negative territory.
Disadvantages of the strategy: When entering on a correction, there is a risk of catching only the B wave of the correction, which moves in the same direction as the preceding trend. However, the 30-period MA on BB%b crossing 0.5 usually signals the start of a correction or reversal, so trades are not recommended when the MA30 on BB%b moves against the trend.
Fig. 3. Correction and the role of MA30.
