Despite the fact that this indicator is quite easy to read it’s not that easy to trade.
We just developed a simple but effective strategy that can be automated and that has proved to be consistently profitable on EURUSD.
That EA is OndaFX.
As you probably know Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s. This volatility indicator is available on the vast majority of trading platforms, including MT4 of course. Bollinger Bands are made up of three lines:
- a moving average in the centre
- an upper band that tries to define when prices can be considered “high”
- a lower band that tries to define when prices can be considered “low”
In order to make a profit in the markets we always do our best to “sell high” and “buy low”, hence an indicator that pretends to measure the “highness” or “lowness” of the price surely grabs our attention
However blindly selling when price breaks above the upper BB and buying when price breaks below the lower BB is NOT a strategy that can be profitable on any financial instrument and any timeframe. As usual we must find our “sweet spot” where this strategy can work profitably. That means finding a financial instrument, timeframe, reasonable take profit and stop loss levels and some trading filters that in the end make up a complete and reliable trading strategy.
I’m going to describe some building blocks of OndaFX, so you can understand and trade this strategy.
First of all the best currency for trading this strategy currently is EURUSD, probably because it is the most traded pair with a high “mean reversion” personality. Secondly focus on H1 charts only and evaluate trading signals only when a bar closes. If a H1 bar closes outside the BB, then you can enter a trade in the opposite direction and aim at 20-40 pips, like shown in the picture below:
As you can see we have 4 trades (1 short and 3 long): each of them is opened at the open of the candle “after” the signal and easily grabs 40 pips.
Now let’s see the rules when a trade goes in the opposite direction from what we expect. In this case we just try to close the transaction at breakeven or with a small loss. This is a very conservative approach that works best in the long run, because it avoids bad trading scenarios when price continues to go straight in one direction after the BB breakout. Let’s see this picture as an example:
We add another short trade only when a candle closes below the median line, and only if the distance from the entry price of the first trade is reasonably big (from 20 to 40 pips according to volatility). Then we close the transaction at breakeven. This example (that comes right after the 4 winning trades shown before) suggests that we could make a handsome profit also in this situation, however our tests show that the conservative approach (closing at breakeven when more than 1 trade must be opened) is fairly superior for the overall profitability of this strategy.
Of course OndaFX EA incorporates other rules and automatically adapts to market volatility (unless the user wants to specify fixed pip levels), but the strategy is basically built upon the two observations shown above.
It may seem weird that a trading system so simple and based on a widely known technical indicator can actually be profitable, however we also know that keeping things simple is often a good design principle for trading systems.
That’s why the KISS acronym (“Keep It Simple, Stupid!”) is being used for more than half a century now to remember that most systems work best if they are kept simple rather than made complex
There are a few simple but critical aspects that account for the profitability of the strategy implemented by OndaFX EA:
- apply the strategy to a currency pair with good tendency to reverse to the mean (EURUSD is a nice choice in this regard)
- select a timeframe that can be reasonably exempt from too much market randomness (like H1)
- fix a take profit adjusted to current market volatility (we use ATR – Average True Range – for that)
- if the trade goes in the wrong direction open another trade only after confirmation of a reversal (the BB median line is used for this purpose)
- try to reduce the risk as much as possible by closing bad trades at breakeven or even with a small loss
- open more than 1 trade in the same direction only if the entry prices are reasonably far apart from each other (the ATR is used in this case too)
When following all these basic rules we have a good chance of success on our side Actually over the last 24 months this strategy - applied to EURUSD only – could have easily tripled a trading account.
As an example OndaFX from the beginning of this month (June 2nd 2013) has generated 408 pips with 13 trades (8 short and 5 long), despite the fact that the last 3 weeks were not a “ranging period” for EURUSD (it rose more than 400 pips instead) .
The indicator at the bottom is ATR which is used mostly for take profit and stop loss levels. The 200 SMA (the orange line) can be optionally used to filter trades that go against the main trend. Applying this filter OndaFX would have executed only 5 long trades for a total 0f 240 pips. The advantage of course is a smaller floating drawdown during trending periods like this one. However I usually like to keep this filter disabled and control the risk with proper money management (in other words: keeping reasonably small the lot size associated to trades).
The beginning of the month was pretty exciting with 120 pips grabbed in the first 24 hours, thanks to high volatility and a long plus short trade right on the spot:
In many circumstances long and short trades are interleaved, in other words OndaFX hedges its positions according to the swinging breakouts of upper and lower band (by the way “onda” means “wave” in the Italian language
In this scenario a long trade was opened when two short trades were still running, thus virtually locking in some profit of the second short trade. Then a short trade was opened when the long trade was still running, again virtually locking in some profit before the take profit was actually hit on the next candle.
We decided to record video showing a livebacktest of OndaFX on EURUSD. In this way you can easily understand the typical floating Profit&Loss involved by this strategy and the windfall pips potentially generated over the last 24 months. We are speaking an average 417 pips per month (or 10 thousands pips in a 2 years period).
And here is OndaFX in action (4 minutes video):
As you can notice Equity line and Balance line grow smoothly during the entire backtesting period
But as for all our EAs, OndaFX is a real trading tool. You can customize every aspect of the EA and discover yourself new pairs and timeframes to trade with.
For example we’ve found that AUDUSD is another very good performer with a 130% gain over 18 months of trading. As a bonus I’ll provide you with the settings for AUDUSD as well!
OndaFX can easily become your private “lab” for understanding how to make the most from Bollinger Bands on different pairs and timeframes. You can change BB settings that are not available with the standard Bollinger Bands indicator of MT4, and you can choose from several “BB breakout rules” that are coded into the EA. You’ll also have complete control over the money management settings, so that OndaFX can safely run on accounts of any size, starting from 1K USD.
OndaFX uses a proprietary Bollinger Bands indicator that we have called HyperBB: the number of “standard deviations” can be expressed as a fractional number (instead of an integer), and the median line can be any Moving Average of your choice (instead of only SMA). HyperBB is provided as a bonus along with OndaFX, so that you can easily follow on chart the trades executed by the EA, in case you want to experiment with some non-standard input parameters of Bollinger Bands.