Headsup! If you want to dig deeper into this, head to the forum and you will find a very interesting (and frustrating!) original strategy there.
In this episode of Truth About FX, Walter shares his experience with trading strategies using Bollinger Bands. You will also learn about this trader in the NFN forum who uses some very effective tricks using this strategy. According to Walter, this is one of the strategies that can be automated easily if you know the trick (which you will find here too!) You will also learn about his “lighthouse” strategy and the pullback method.
Download (Duration: 8:34 / 20.5 MB)
In This Episode:
00:58 – original strategy
01:26 – rainbow
03:00 – whipsaw
04:29 – naked ones
06:24 – inherent difficulties
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. Are there any strategies that you’ve tested with Bollinger bands?
Walter: Yes, I did do one and I actually traded it but it was back in 2006, something like that. Anyway, the way that it worked was that you would, I know Nicola and Emmanuel in the forum. If you’re in the forum, you can see that they both trade with… Oh no! Sorry. Emmanuel no longer does but he used to. Nicola uses Emmanuel’s original strategy with Bollinger bands so there’s a couple of them there.
If you’re interested in that and you’re in the forum, you can check that out but the one I’m talking about is totally different. It was really cool actually. It was frustrating though and at a certain point I just decided to move to last keys setup instead but I’ll explain how it works.
It’s a simple idea. What you do is you put a bunch of Bollinger bands on the chart like a whole bunch of six or ten or something. Crazy, right? They all have slightly different settings and so they end up like these rainbow-colored charts and with all these different colors.
What you do is and this would be really easy to automate, by the way. In fact, one of my friends did do this, who is trading this. I think he ended up automating it and I don’t know if he is still trading it. I haven’t kept in touch but essentially what you would do is you would wait for the candles so you wait for all those Bollinger bands to restrict and get really tight and close together.
They all have slightly different settings. Point one and point one-five, or point two or whatever, it was like that.
And so then what will happen is that they would restrict and after a certain number of candles, you would have a trade ready to go. So if the market got really quiet and the candle sat inside all of those Bollinger bands and all of the Bollinger bands are basically on top of each other.
It might be like 40 candles. I think it was something like that. I would wait for 35 or 40 candles, it was something like that on the one-hour chart. It had to be pretty tight, not really going very far then you would wait for it to break out.
Once it broke outside of those bands, and I’m talking about the bands where when it was tight because obviously the bands open up as soon as it starts moving. But, as soon as it broke higher or lower than that restricted range, you would just go in.
You would also have other orders on the other side of the bands which should be a stop and reverse. So if it went long and you were in and then it reverses, it went short, which actually happen quite a bit, you would get out of your long and then enter a short.
There is some whipsaw involved for sure, I think that’s kind of what turned me off. I thought I could just trade this naked strategy with the last keys and it’s better because I have more of a confirmation that it’s a true breakout.
I like it better but I think this one is really cool if you’re into automated trading. It makes a lot of sense. You just kind of wait for the market, sit on those Bollinger bands for 35 candles or whatever it is.
You could also trade a fifteen-minute chart, I’m sure of it but something like that and then as soon as it breaks outside of those Bollinger bands, you’re long or short and you could have a stop and reverse.
It’s pretty cool because the risk-reward like if you have a trailing exit or a really aggressive target, the reward to risk is really good on these which is awesome but it’s also you know, you can also get whipped around a bit and it can be frustrating. That’s the nature of breakout strategies.
Hugh: Yeah. Where is the profit target on those trades?
Walter: On those trades, I think I was using 5R or something like that.
Walter: Yeah, it was pretty cool. Actually, if I were to do it again today, I would probably just use a trailing exit. I know that that’s difficult. I mean, the good news is, with the strategy typically you have really tight stops.
You might have — in a one-hour chart — you might have like a 30 or 35 pips stop. You could go 170 pips and get 5R, 150 pips or something like that. So that is the great thing about it.
Hugh: Would you say that you’re not much of a breakout trader and that doesn’t fit your personality?
Walter: Not necessarily. I just like the naked ones. There’s one like the last keys obviously. I consider that a breakout and I also like to trade which is called the “Lighthouse” which is Reima meant to give it the name. I call it the “high brow” but I thought it was pretty lame. Reima’s name was better.
I didn’t realize we’re both working on the same system or the same setup. My favorite kind of breakout trade is when the market is clearly moving in a trend and then it gets really tight. That’s the one I like.
So what that would look like is on the let’s say, the daily candles have gone two out of the last three daily candles have really strong upward so it looks like a bullish trend. And then you get some little tiny daily candles that are sitting right at the top of the most recent big bullish daily candle then I would go, “Look at that, yeah” maybe drop down to the one-hour or four-hour chart and look for the breakout there, you know what I mean? Because then you’ll have a bias.
You know like you only want to buy here, you’re not really worried about getting whipsaw. Sure you could go up and then go back down but it’s in an uptrend. So those little ones I like nowadays.
Actually, I find it amazing that more traders don’t trade breakouts because it seems like such a simple thing to automate and yet if you’ll talk to someone like Adam in the forum, he talks about how the simplest and he’s programmed a strategy from Market Wizards and things like that, he says that the one thing that they can always rely on in terms of making an automated strategy work was trend trading, like trend strategy.
What I found interesting, I mean, it makes sense that you can use like a program that but I always, I don’t know why in my mind I always thought the breakout strategy will be the easiest one to program. I guess, there must be some sort of — I’m not a programmer so I don’t know but there must be some sort of — inherent difficulties with that, that I am not aware of.
Hugh: You mean like, the market is trending and then it breaks at a certain level, is that what you mean by a breakout? I mean, a trend tragedy?
Walter: There’s a couple, — I’ll put another link for people interested — there’s one Ryan Jones book which is about the fixed ratio money management strategy. I think at the end of the book he actually has a trend trading strategy which is really simple.
It’s something like if the market is above the twenty moving average and the current candle was higher than the ten candles ago or something like that, and then you have two down candles then you buy on the third candle. So it’s like a pullback.
It’s the definition of a pullback. That was literally his trend trading strategy and I thought that was interesting. It’s just basically if markets above the trend or the moving average and it’s making higher highs and then two candles go down so then you’d expect that the third candle goes up.
I think he trades that in the futures but I’m pretty sure that you could make something similar to that working in forex as well as an automated strategy. So I thought that was interesting.
I think if you go to the Turtles, they’re basically trading if it’s a breakout like the 28-day high or the 28-day low or the 54-day high or the 54-day low, they’re trading that too sort of a breakout strategy. As soon as the market makes a new 54-day high or 54 candles high or whatever, they go long and vice versa with the shorts.
I think it seems like those seemed to be, according to Adam and he would know way more than I would about it, those are the kinds of strategies that make, they are easier to make it work. Interesting.
Hugh: Cool. Thanks, Walter.
Walter: Thanks a lot.
“The Trading Game: Playing by the Numbers to Make Millions” book by Ryan Jones