Trading Strategy Testing
Learn about the bollinger bands trading strategy in forex, particularly using the bollinger bands indicator, and backtest it using an expert advisor. The strategy involves going short when the price touches the upper band and going long when it closes below the bollinger band. It is suggested that this strategy works best on the daily time frame, and backtesting is an essential step to evaluate its profitability accurately. Though the initial backtesting result showed a success rate of more than 80%, a significant drawdown was noted in the 10-year backtesting result, suggesting that it might not be advisable for traders to rely solely on this strategy.
Trading Forex using Bollinger Bands: Analyzing a Simple Strategy for Successful Trading
Introduction
When it comes to trading Forex, there are numerous indicators and technical analysis tools that traders use to make informed decisions. One of the most popular such tools is the Bollinger Bands indicator, which is based on trend lines plotted two standard deviations positively and negatively away from a simple moving average of a securities price. In this article, we will analyze a simple Bollinger Bands trading strategy that has a high success rate of 90%, as claimed by one of our subscribers. We will explain the strategy in detail, provide examples from the chart, and backtest it using an expert advisor.
Understanding Bollinger Bands
Bollinger Bands are a type of price envelope developed by John Bollinger. They define upper and lower price range levels and are available on most chart platforms. When using the indicator, traders can adjust the values for two parameters – period and standard deviation. The default values are 20 for the period and 2 for standard deviations, but traders may customize them based on their preferences.
The Bollinger Bands indicator is a lagging indicator, which means that it is based on previous price action data. This type of indicator is used by traders to analyze the market using an average of previous price movements. It serves as a tool that can get traders into trades that have greater confirmation behind them, as they are based on more data.
The Bollinger Bands Trading Strategy
The Bollinger Bands trading strategy that we will analyze in this article is entirely based on the Bollinger Bands indicator. It involves selling when the price touches the upper band and exiting when it touches the lower band. Similarly, it involves buying when the price closes below the lower band and exiting the trade once the price touches the upper band.
It is noteworthy that this strategy doesn’t involve a stop loss, which means that it is a bit risky. We will backtest this strategy using an expert advisor to determine its level of profitability accurately.
The Backtesting Process
To perform the backtesting process, we will use an expert advisor. This is the most accurate and fastest way to review any trading strategy. It helps traders find the reasons behind losing trades and determine the best settings for each currency pair. If you don’t know how to build an expert advisor, you can find people online who offer this service. They usually charge up to $500 for a sophisticated one. Alternatively, you can learn how to do it yourself from A to Z using an online course.
To backtest the Bollinger Bands trading strategy, we will make some adjustments to the expert advisor settings. We will use the daily timeframe, and run the backtesting process over the last three years using the EUR/USD currency pair. We will enable both buy and sell orders, and allow the expert advisor to place as many trades as possible. We will also use a 1 micro lot volume size to avoid any early margin call.
To avoid risking our capital, we will disable both the take profit and stop loss, and have the expert advisor close the trades only when the price touches either the upper or lower Bollinger Bands. We will exit the trade if the price reverses to protect our capital in case of any major price reversal.
Results of the Backtesting Process
After completing the backtesting process using the expert advisor, we obtained the following results:
We made a significant profit, which indicates that the strategy is profitable.
The drawdown is relativley low, which is a good sign.
We executed 46 trades in total, with an average of one entry per month, which isn’t a bad trade frequency.
The win rate was more than 80%, which is fantastic for any trading strategy.
However, the drawdown is relatively high, indicating that the strategy is a bit risky.
By analyzing these results, it seems that the Bollinger Bands trading strategy can indeed be profitable if executed correctly.
Conclusions and Recommendations
Based on the backtesting results, the Bollinger Bands trading strategy submitted by one of our subscribers appears to have a high success rate of 90%. However, we performed further backtesting using the expert advisor over ten years and found that the equity reduced drastically. This indicates that some adjustments to the take profit and stop loss levels need to be incorporated to avoid this situation.
Therefore, our recommendation to traders is that while the Bollinger Bands trading strategy is simple and effective, it is crucial to monitor the trade entries carefully. We also advise that traders incorporate stop loss and take profit levels to protect their capital more effectively. While backtesting the strategy using an expert advisor can give traders an idea of its profitability, they should always be cautious and analyze the market comprehensively before executing any trades.
