The next strategy to be backtested in line is the trading strategy using Bollinger Bands and Awesome Oscillator.
The strategy itself is quite simple and comprehensible even for the beginner traders – the entry points are easy to identify. However, is it so easy in action as it seems?
In the case, you are curious to learn what were the results of the MACD strategy backtesting, read the full article here.
If you wonder how we came up with the idea of this backtesting experiment, read the full version here.
Bollinger Bands indicator consists itself with 3 Bands – Upper, Middle and the Low Band accordingly. The Upper and Low Bands form a kind of Resistance and Support levels and the width between them or the Price location according to them provide numerous signals about the trend, possible reversals or the further continuations.
Another great thing is that Bollinger Bands is the kind of complex and inclusive indicator so it can be read in several different ways.
For this specific strategy, we will use the signals from the candlestick cross of the Middle Band of The Bollinger Bands, taking as a fact that candlestick closing over the Middle Band signals about uptrend starting and vice versa – a candlestick closing below the Middle band provides signals about downtrend about to begin.
As a compound system itself, the Bollinger Bands indicator can provide signals of the trend ranges and reversals. However, accompanied with the Awesome Oscillator it creates a perfect pair of the indicators for the most precise signals of the trade entries. Awesome Oscillator is a great tool to check the strength of the trends.
Awesome Oscillator is the histogram with the slopes crossing the zero level, turning red or green according to the strength of the Bullish or Bearish trend.
As well as the Bollinger Bands, there are 3 different options to trade the Awesome Oscillator, but for this particular strategy we use the next way to trade it:
However, feel free to try different options, because their diversity open up new backtesting and trading opportunities.
Indicators: Bollinger Bands (20;2), Awesome Oscillator.
Timeframe: 1 hour.
Currency pair: any, but EURUSD preferable.
Stop Loss/Take Profit: 20 pips*
* We adjust the equal number of the SL and TP in order to ease the math calculations and make the results more illustrative; however, you can adjust the size of the SL and TP reasonable for you or set it manually for every trade.
**If you want to set it manually, put your ST at least 2 pips below the closest swing low and TP above the previous swing high for the long trades and vice versa for the short trades.
Buy Entry Rules:
Sell Entry Rules:
|Market||Training set||Forward testing|
|Bull||45 pips||90 pips|
|Bear||15 pips||0 pips|
|Flat||120 pips||-45 pips|
|Market||Training set||Forward testing|
|Bull||01/03/2011 - 03/05/2011||09/06/2010 - 06/07/2010|
|Bear||01/01/15 - 18/03/2015||01/09/2014 - 23/09/2014|
|Flat||01/09/2016 - 09/11/2016||04/05/2015 - 08/06/2015|
A Reminder: in order to save your valuable time and efforts, we have introduced the system of backtesting when you perform only 50 trades through 3 different types of market (Bullish, Bearish and Flat markets) and then again 20 trades through the given types of market, but during other periods. Then with simple math calculations, we can make conclusions about effectiveness or irrelevance of the chosen strategy.
The full version of the theory of our backtesting experiments and how did we came up with the idea of such backtesting you can read here.
Unfortunately, within the given setting, timeframe and the listed above rules the strategy turn out to be a disappointment.
As expected, the most unpredictable performance was during the Flat markets – as this kind of strategy is based on the trend trading during the ranging markets this pair of indicators can provide the trader with the false signals.
Should a trader discard it? Definitely not. We strongly recommend to check the “Further Adjustments” section below - we have listed some recommendations how you can try different settings and how even the slight changes can result into the drastically changed outcomes of the trading.
As you can see, the main idea of our backtesting experiment was to show that:
What particularly can be a matter of the additional change and backtesting?
Please, take into the account that our floating spread is set to 1. Do not forget that the size of the spread matters and the larger it is, the bigger should be the profits to cover it up.
As you can see, adjust, test and then change accordingly – is the only possible way to find the options suitable for YOU.
There are dozens of the ways to trade the indicator alone or with the combinations with other ones. We show only one way to trade, however, nothing should stop the curious minds to try different settings and check how it can influence the final results.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program.
To check this (or any other) strategy’s performance you can download Forex Tester 3 for free. In addition, you will receive 16 years of free historical data (easily downloadable straight from the software).
Are you one of the Bollinger Bands’ fans or do you favor other indicators instead? Share your opinion if you have tried this combo of the indicators before and what were the results.
Have you ever try the Bollinger Bands indicator with the custom settings?
What do you think about this strategy in general? Does it sound promising to try?