BOLLINGER BAND TRADING STRATEGY

THE BOLLINGER BAND SYSTEM INTRODUCTION The Bollinger Band was developed by John Bollinger by calculating a simple moving average of prices. Bollinger bands are best plotted with a bar or candlestick chart so that the proximity of the bands to the prices can be easily observed.

SYSTEM CONCEPTS AND THEORY The Bollinger Band System has its base principle on the concept of overbought and oversold market conditions. It is built around extreme market conditions. An overbought or oversold market is one where the prices have risen or fallen too far and therefore likely to retrace. Prices near the lower band signals an oversold market (Buy Signal) and prices near the upper band signals an overbought market (Sell Signal). The system is very robust and it catches top and bottom formations easily and visually. It also filters out fake outs by using a further confirmation indicator. SETTING UP THE SYSTEM The system requires the following set of indicators on the chart:

Bollinger Band with its default setting Stochastic Slow with its default setting

How to Setup the System in Marketiva

Right click the chart and select indicator, choose Bollinger Band Right click the chart and also select indicator and choose Stochastic Slow

TRADING RULE

Conditions for Long Entry

Enter Long only if the lower limit (lower band) of the Bollinger Band is broken (that if the market goes below the lower band) and the Stochastic Slow has a value lower or equal to 25units.

Conditions for Short Entry

Enter Short only if the upper limit (upper band) of the Bollinger Band is broken (that if the market goes above the upper band) and the Stochastic Slow has a value greater than 75units.

Exit Stop Loss

The exit stop loss should be set to 30pips. You may also decide to set it to

your own preference. The signals from this system are almost 90% accurate and rarely go to stop loss.

Exit Target

Use either trailing stops or adjust your exit target to a fixed pip value depending on how far the market can move. Always check the wideness or distance between the bands of the Bollinger Band for an insight on how far the market can move. The farther the distance between the bands the larger your exit target should be.

Order Type

The market order is the only recommended order type to use for the Bollinger band System.

HOW TO LOOK FOR MARKETS WITH BETTER BOLLINGER BAND

PERFORMANCE

Market where the distance between the lower and upper bands of the Bollinger is large performs better. The higher the distance between the bands the more the pips we are most likely to get. Markets like USD/JPY and GBP/USD is very friendly to this system. NZD/USD is the most stable but has lesser daily pips movement. Tight bands don't return large pips.

EXCEPTIONAL CONDITIONS

1. If the Bollinger band signals a Buy or Sell, that is when the lower and upper band respectively is broken and the Stochastic Slow is very close to the 0 mark or very close to the 100 mark respectively, such trade is almost 100% guaranteed to go to large profit. This type of signal is called the Absolute Position. They are usually traded with higher volumes.

2. If the markets gets very close to the upper or lower band of the Bollinger Band and did not necessarily touch or break through the band but the Stochastic slow reads below 25 or 75. Such trade is still ok and should be taken.

3. *If the distance between the lower and upper bands is too close, dont take any signals generated from such bands. Signals generated from such bands are not usually reliable. Also signals generated from squeezed bands or cycling bands should not be considered.

4. If the market is trending sharply, the Bollinger system may sync even if the signals is not reliable. You are to wait for a formation of a top or bottom before taking the signal. A top or bottom formation is usually seen on the stochastic indicator as a divergence. Divergence occurs when the Chart is making a new high or low but the stochastic is showing the reverse.

THE BOLLINGER BAND SYSTEM EXCEPTIONS

1. SHARP TRENDING MARKETS

From the chart above, immediately after our system captured the Short entry, the market started trending sharply down. The Bollinger system usually signals a trade before a major reversal market. The market was making series of breakout of the Bollinger band and also the stochastic indicator was giving us a confirmation even when it was a fake out. This is because a bottom or top is about being formed. You should wait for the first candlestick that closes inside the Bollinger band or use the more reliable Stochastic line flattening pattern. If you view the pattern of the stochastic line very close to the major bottom or top, you will notice it is usually flat. All entries should be done at flattening of the Stochastic lines for very sharp trending markets. Always know that anytime the stochastic line flattens, a top or bottom is about being formed.

2. SQUEEZING OR FUNNY BAND FORMATIONS

Avoid bands like this. Go to other markets if you see Bollinger band formations like this. Trades generated from this type of band are irregular and can lead to a lot of whipsaws. Staying complete clear of such bands is a better option.

3. TOO NARROW BOLLINGER BANDS

If the bands are too narrow, the average pip movement for each signal generated is always very low. Better results are seen from charts with large gaps between the lower and upper Bollinger band. Avoid markets with too narrow bands

4. CUPPING OUT BANDS The Bollinger usually cup out by tightening its mouth whenever the market is about blasting up or down. Any time the Bollinger bands form a shape that is similar to a balloon that is about to been deflated, the market will is mostly likely going to trend sharply. We are to allow the market to trend until we a top or bottom condition is established. Take a look at the charts below:

You will notice that after the break of the Bollinger band the market stayed above the band for a while. This pattern is called the Bollinger Band breakout. For our system, this piece of information is only important to us for reasons of waiting to enter the market after a top or bottom has been formed. You can

see the top or bottom formation from the stochastic lines.

BOLLINGER BAND TRADING SYSTEM

CHART 1: NZD/USD Hourly chart monitored using the Bollinger band for a week.

From our chart, the signal spots have been labeled from A - J. We are going to treat some of the peculiar spots. The chart is self explanatory.

Long (Buy) Signals Generated The system was able to capture six Long trading opportunities that synchronized with the system's trading rules. These Long signal spots are B, D, F, H, I and J. At spots B, D, F, I and J the Long signals were very successful. Our trading conditions for a Long Entry was also satisfied which stipulates that we should enter Long only if the lower band of the Bollinger band is broken and the Stochastic slow is below the 25mark. Our only exception was the signal at spot H. The signal was unsuccessful though it met the trading conditions. Our stop loss level was reach (-30pips) before the market was able to move long. See the system cautions and fine tune strategies to be able to filter out losses like this.

Short (Sell) Signals Generated The system was able to capture five Short trading opportunities that synchronized with the system's trading rules. These Short signal spots are A, C, E, G, and K. At A, E, G and K our trading conditions for a Short Entry was satisfied which stipulates that we should enter Short only if the upper band of the Bollinger band is broken and the Stochastic slow is above the 75mark. Our only exception or trade we would have missed was the setup at C. The signal was not confirmed by the Stochastic Slow.

BOLLINGER BAND TRADING SYSTEM

CHART 2: USD/JPY Hourly chart monitored using the Bollinger band for a week.

From the explanation on chart 1, you should be able to pick out the signals in chart 2 above. We have 4 Long and 4 Shorts that satisfied the conditions of entry.

DAILY TRADING ROUTINE OF A PROFESSIONAL TRADER

A professional Forex trader has a systematical way he approaches the market daily. Forex trading is a profession and like every other profession, it has a defined principle it operate with. Just understanding a simple successful trading strategy does not really guarantee profit. This is because success in the FX market is a combination of other important trading factors. One of such factors is building a good psychology to avoid the so called awesome return popularly hyped about this market. The Forex market must be approached like every other investment vehicle. It is not true that the Forex market carries more risk; we are the one that raised the level of risk. You may decide to trade the market with very low risk and make it look exactly like the stock market. The choice has always been ours. The market requires that you access research information and FX data analysis daily to dynamically update your knowledge about the direction currencies are heading for. Many young traders jump into trading immediately without getting well informed about the major market forces for the day. Before we take a look at our daily trading routine, lets work on our psychology: 1 WORK ON YOUR TRADING PSYCHOLOGY 1.1 Returns and Expectations Many of us came into the market with unrealistic expectations. Great returns can only be assured by the power of compounding in the FX market. Monthly spontaneous returns are not advisable because they are difficult to maintain and a system built around it will lead to deeper losses as the month progresses. Growing steadily at an average monthly return of 20-50% ROI is more stable and can make you very wealthy in the long run. Lets assume you started trading by January 2007 with N50, 000 and you were able to grow at stable 20% return monthly, it means after 24months, your account balance would be more than N3.9Million. 24months is not a long time frame really to wait; many will buy a stock and wait for over 5 years before it will appreciate to 200% that is if it ever gets there. N50, 000 returning N3.9million is more than 7,800% ROI in just two years. I only trade stock because I wanted to build asset not for returns. Stocks are better ways to save or keep your money. If you are a student at the DS Community, you will understand and agree with me that 20% is not really a successful return for a professional trader with the kind of information he has about the market. 1.2 Health Factor It is usually advised that you should stay away from the market if you are sick or not in the right mood to trade. You will need your entire God given senses alert to trade properly. Trading under ill health can affect your returns. Also trading with fear always leads to losses, you will need a lot of confidence to trade the FX market. The first step to developing confidence in the market is in knowing how to effectively manage your risk. With a good understanding of risk management, you will trade a Billion naira just the way you will trade

N5, 000 capitals. It is a matter of principle not volume. The risk management principle is the same at all levels. Warren Buffet took a trade some years ago and when the trade went to stop loss, it took out $206million (N25Billion) from his account. Just imagine what the total capital he trades with in the Forex market will look like. Two months after that loss he made $420million (N54Billion) from another position. Another World leading FX trader, George Soros, made $1Billion (N125Billion) within 2 weeks from a single position and the Bank of England almost crashed after that massive take home profit. The point I am trying to raise here is that risk is not a factor of your trading capital. Many persons tell me that they cant imagine themselves trading with N10, 000,000; it is just too risky for them. They say the money is too large to manage in the FX market. My question is, what principle are they using to manage their small funds? If they are truly managing these small funds effectively then increasing the volume will not affect the risk level. If you are the type that doesnt like high risk, then go for very low risk trading principle. Every student at the DS Community should be very conversant with risk management because it is the number one thing I teach every intending Forex trader. Once you understand how to apply the risk management calculations and concepts you will be bound to trade without fear and with profit daily. The market will be interesting and peaceful to you. 1.3 Trading Plan or System The next important confidence booster is your trading plan or system. Every trader must have a Mechanical way of trading the market, though the plan may require some personal judgment. A mechanical trading plan is a system that automatically monitors price movement and looks for a regular sequence that leads to Buy and Sell signals. This means you do less analysis but trade more. Your only responsibility is to validate or verify how reliable the signals developed by the trading system are. Most approved profitable trading systems have at least a 60/100 winning odds. It means for every 100 trades you make, you are bound to win 60% of it. Without proper FX money management, you may still end up as a failure. After studying the short course on FX Risk Management, you will understand why. If you are able to build your trading psychology around these two important trading principles

good risk management and a profitable trading plan or system your confidence in the market will be very high. STEP BY STEP ROUTINE OF A PROFESSIONAL TRADER STEP ONE: BOOST YOUR MOOD. Before I turn on my laptop to trade, I normally speak positively or prophetically to all my trades for the day. I simply say: I am going to trade profitably today and gain more knowledge about the market. I will see all profitable trading opportunities and I will trade them. I am in control. Amen! IMPORTANT: The volume or size of your trading portfolio can also affect your trading psychology. Trading with very little capital will make you trade erratically and with high risk, this is because you will have

little or no regard for defined trading principles. When you trade with tight risk management, you

may not return the kind of hyped monthly gains the media is saying Forex trading gives. You will discover that your returns are modest but very stable. Most people come into the market expecting over 300% ROI monthly. 300% is possible but too risky and a trading plan built around it, will lead to massive losses over time. If you are trading with little capital, what I will advise is that you pay more attention to the % return not the dollar value because someday you will be trading with millions. Whatever you learn now with your little is what counts with your much. Therefore apply the right principle irrespective of the size of your capital.

This may sound funny if you are not the type that is spiritually inclined. Saying those simple words before trading can greatly impact your confidence and add a better dimension to your trading experience. I have been saying those words for over 5years now before trading. It has given me an edge over the market. I have the absolute faith that everyday I trade; I should make an aggregate profit. Be a little spiritual, there is nothing wrong about adding faith to your trades. STEP TWO: READ THROUGH MARKET ANALYSIS FROM INDEPENDENT FX RESEARCH ORGANISATION AND BANKS. Understanding the prevailing market sentiment will greatly help you pick out the major trades daily. FX trading requires some level of sophistication and access to vital market information. Banks and other trading organizations publishes research papers, commentary and market outlook daily to guide traders. Studying this information before trading will help prepare you for the major market move for the day. Also reading independent FX research documents daily over

several years will help mould you into a well informed and better professional in this market. There are several websites that publish research information and also run commentary daily. Though these data may be very boring and uninteresting at the initial stage, but after several weeks of constantly forcing and tuning your mind to study them, you will start understanding how important these researches are. There is no major move in the market that was not mentioned by an FX research organization before it happens. The move of EUR/USD from 1.2600

to 1.3600 was a major headline on several research papers published by some FX research organizations. Depending on too many websites that publish FX research information can make the whole process tiresome and very slow. I use only one website for all my FX Research updates and events. The site URL is www.actionforex.com. It is the best website for fast updated FX research information. It has a lot of information for traders but there are a few you should concentrate on daily and this will be the ones I will treat here. INFORMATION TO LOOK OUT FOR DAILY: 1. ACTION INSIGHT This section contains analysis reports produced by the actionforex.com in-house FX analyst team.

Reports are updated twice a day. Their Forex Daily Technical Reports are updated during European opens while the Forex Mid-Day Technical Reports are updated during US opens. It helps the trader understand the major news release that is most likely to move the market. Members of the DS Trading community that use the news breakout system do ask; how does one

know the news release that is most likely to move the market? Action insight will tell you that. Not all news move the market, only those anticipated by a majority of traders move the market. Today CPI can be a major market mover and could offer no impact on the market some other day. This is because there is always a set of news releases investors are looking out for to confirm their speculation and this information could be anything from new home sales to rate hike. Holding a stereotypic stand on what news will move the market is completely wrong. Any

news release can move the market depending on its relevance for the moment. How to Get to the Action Insight Page The action insight sub section is the website may caption. It is found on the home page of the website. Take a look at the site screen shut I made to help us locate where it could be found. I circled the important spots. Also note that the URL was www.actionforex.com

2. DAILY FUNDAMENTAL ANALYSIS AND REPORTS Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. Fundamental analysis, including Forex fundamental analysis, is a

method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors (to name just a few elements) within a

business cycle framework. Forex fundamental analysis can be used to forecast economic conditions very effectively. But Forex fundamental analysis may not necessarily forecast exact market prices. Forecasting models in Forex fundamental analysis are as numerous and varied as the traders and market buffs that create them. Two people can look at the exact same data and come up with two completely different conclusions about how the market will be influenced by it. Therefore is it important that before casting yourself into a particular mold regarding any aspect of market analysis, you study the fundamentals and see how they best fit your trading style and expectations. For Forex traders, the fundamentals are everything that makes a country tick. From interest rates

and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. Therefore, it is best to get a handle on the most influential contributors to this diverse mix than it is to formulate a comprehensive list of all "The Forex Fundamentals." This section: Forex Forecast and Analysis - Forex Fundamental Analysis Reports focuses on Forex

market and world economy. Reports are contributed by external analysts. How to get to the Daily Fundamental Reports and Analysis The fundamental reports can also be access from the home page of the actionforx.com website. Please see the screen shut below:

3. ECONOMIC DATA OR NEWS RELEASE Trading without a prior knowledge of a news release can mar your trading system. A better understanding of how to trade during news release is very important. I normally close out all my

trades very close to the time a major news is about been release and I re-enter once the news is out. A position already doing very well can be wiped out during news time. It is wise you record the time for all your news release; this should guide you as you trade. To avoid trading the erratic influence on technical trading systems, you should trade from about 6pm 7am daily. There is lighter influence of news release on the market during this time frame. Technical trading strategies work best on quiet market. I make more money during this period (6pm 7am) than

during the regular trading hours (8am 6pm). Test the advance R-S system during this time and you will be shocked by the returns. Even the Bollinger Range Bound Trading system gives almost 95% odds during this time frame. I discovered this some years ago when I had a student that works with the Nigeria Power Holding Company (previously NEPA). This student comes to my

office for training every evening after work. After lecture, he usually browse through about 12 currency pairs for any signal from the BRB System, he will place all trades and sets targets for the position close to the 7SMA and stops to a fixed 30pips. He usually places these trades at about 7pm 9pm in my office. He started with a capital of $200 and after 2weeks, his total account balance was over $400. How to get to the Daily Economic Data The daily economic data can be access directly from the home page of actionforex.com. Take a look at the site snap shut to find out where to locate the daily economic data. The economic data can be access from the home page, to go to the current day eco data, you will need to click on the valid date and another page will open with the details of the news releases for the day. Take a look at the snap short of a typical eco data and I will explain later how it affects your trades for the day.

Lets explain some items on the table how they affect our trades: GMT: The GMT column represents the time the news release will be out. You need to add 1 hour to the GMT time to convert it to Nigerian time. The Canadian Rate Decision for May was slated to be out by 13:00GMT and this will be 2pm in Nigerian time. CCY: The CCY is short for currency. The CCY represents the currency of the economy that has the news release.

STEP THREE: START TRADING With all the information gathered from action Forex, you can now approach the market properly. Never trade without a profitable trading system. Without a successful trading system, you will never

be comfortable with the Forex market. Even though, you have spent 10years in the market, you

will still be hovering around the market with constant reloading of your account. Trading systems

when perfectly followed will always give you an aggregate positive return by the close of every

trading month. You should get a good calculator close by whenever you are trading. I calculate my %commitment and trading volume to exact value. Make sure your entire trades tally with the risk level you have chosen for your trades. STEP FOUR: DOCUMENT ALL YOUR TRADES Many of us dont document our trades. Documentation helps you avoid errors and also get your

properly organized. Get an exercise book and record all your daily profits and losses. Also write down the reason why you took your trades. Write down the full details of the position like currency pair, position, entry price, stop loss etc and finally the outcome of the trade. At the close of the day, give a general comment about the summary of all your trades. VERY IMPORTANT Always exit all intra-day trades few minutes before the release of major economic data. The best and recommended system for trading during news releases is the news breakout system.