Tue. Oct 26th, 2021

Complete guide to the stochastic indicator

The Bollinger Bands Trading Strategy (Divergence) or what we would call the Bollinger Bands Divergence Strategy is an advanced setup based on the knowledge of multiple strategies. The reason why the Bollinger Bands divergence strategy works is because the two different strategies, the RSI and the Bollinger Bands strategy, complement each other, covering the weaknesses and improving the points. forts. How exactly do they do it? To find out, we must first understand how individual indicators work.

Content

    1. Purpose of the article (FAQ)
    2. Bollinger band divergence for beginners
    3. How to use
    4. Is it possible / feasible?
    5. Commercial rules
    6. Pros and cons
    7. Analysis
    8. Conclusion
    9. Information

Purpose of the article (FAQ)

    1. what do Bollinger Bands tell you?
    2. how to use Bollinger Bands with RSI?
    3. What is the divergence?
    4. what does divergence mean?
    5. how to find divergences?
    6. does RSI mean?

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Bollinger band divergence for beginners

While the divergence of Bollinger bands is a fairly advanced strategy, it is one of the many strategies on the list that beginners can master and pick up. Beginner traders tend to need more guidance in reading the market and executing the trade, as they tend to exceed the trade in the market, which allows for lower probability operations to be included in their decision-making process. To curb this common problem among newer operators, the Bollinger Bands Divergence Strategy is able to provide a form of cross-checking to filter out most “unnecessary operations” that should not be taken as it comprises two complementary function trading indicators. In addition, preventing excessive trading would also lead to peace of mind and a less stressful trading session, as the new trader has more confidence in trading with reliable confirmation. This would also mean that the new trader would receive less emotional pressure during their trading sessions, as conducting smaller trades would mean avoiding more emotional roller coasters. Ultimately, this would also save the accounts of several beginners and give them a less bumpy start to their business career.

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How to use

Bollinger band divergence is easy to use as long as you know the applications of the indicators and also the concept of divergence in the market. This strategy works by identifying areas bought to sell and areas sold to buy. Once identified, look at the RSI indicator for any market discrepancy, also known as divergence. If the RSI showed a strong divergence, expect prices to form a price action signal corresponding to the direction of the trade. Finally, run the trade and manage it through trail stops.

Read also: Algorithmic trading strategies
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Is it possible / feasible?

The strategy of the Bollinger Bands alone depends on the Bollinger Band indicator. The Bollinger Bands indicator segregates the market into 3 main sections for technical analysis. The Bollinger Bands indicator is also able to identify and mark areas bought and sold, also known as areas passed or below. In addition, it is able to identify markets during low and high volatility due to the contraction and expansion of bands with respect to price movements. However, being able to weaken the entries is the biggest weakness of the Bollinger Bands indicator.

On the other hand, the RSI strategy depends largely on the RSI indicator, which is able to represent the price movement as an oscillation of a range from 0 to 100. This also allows you to identify areas bought and sold in the market as well as divergences. One divergence is the discrepancy between market momentum and market price movement. This means that there are scenarios in which, even when the market is bullish, the underlying momentum increases at a decreasing rate or may even decrease. Being able to read and identify bullish and bearish divergences can allow traders to be one step ahead of the market and thus allow them to predict the next market move more accurately.

The two indicators may have their respective strategies, but when combined, they complement each other and lead to a better strategy that eliminates a lot of bad business. This can be done by cross-referencing the market with the two indicators mentioned. For example, before executing an operation that fits the description of Bollinger’s band strategy, we can also take a look to see if there is any divergence present that greatly increases the probability of winning the operation.

While the strategy can also be used for normal Bollinger band configurations, it is recommended to play in the market only when there is some form of divergence. This helps prevent excessive market trading, which leads to the prevention of many potentially bad trades that can affect your account statistics and your trading career.

Read also: Futures trading strategies

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Commercial rules

To apply this strategy, take note once RSI shows divergence. Isolate the divergence with 2 vertical lines. Then expect a bounce in the upper or lower band of the Bollinger band, depending on the direction of the divergence. Then trace the nearest support or resistance level near the rejection bounce. Enter the trade with a strong bounce from the lower or upper band and place the loss order below the nearest support or resistance that was traced. Once the trade is executed, proceed to track stoploss orders below each new support point or resistance formed.

trade rules

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Pros and cons

The advantages of adopting the commercial strategy of divergence of Bollinger Bands is that it is more likely to win an operation, as it incorporates divergence into the decision-making process. In addition, it is able to obtain information on developments in the markets in advance with the Bollinger Bands compression strategy to provide market information in advance. This allows the trader to be prepared and prepared to trade with the break that is forming. Finally, as Bollinger Bands segregate market movement into 3 segments, it allows the trader to assess movement and price valuation, giving additional information to change the market more likely. However, it is slightly complex to use this strategy, especially for beginners, as they should be familiar with everything about the indicators involved, as well as the theoretical knowledge of divergence. Subsequently, this strategy does not have a fixed profit return, as it is based on the intensity of prices that would bounce from the upper and lower bands, given that the middle band could also act as an area of ​​resistance. Therefore, profit margin is not a constant variable in business strategy.

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Analysis

To find out the profitability of Bollinger’s band divergence trading strategy, we decided to do a back test based on the last 10 transactions starting July 30, 21 in the H4 time period. The rules of entry will be the same as those mentioned above. We will test it again in 3 types of commercial vehicles, namely EURUSD for currencies, US30 (DJI) for stocks and BTCUSD for cryptocurrency. For simplicity, we will assume that all transactions performed have a risk of 1% of the account.

Read also: Bat pattern

Definitions: Average risk-reward ratio = (Total risk-reward ratio of winning trades / total number of gains) Profitability (% gain) = (number of gains * reward) – (number of losses * 1) [ Risk is 1%]

An example of the application of the strategy is shown below:

For Backtest results, operations with blue and yellow zones indicate an overall victory with the blue zone as a reward and the yellow zone as the assumed risk.

As shown in our subsequent test, the earnings percentage of this strategy for EURUSD (Forex) is 60%, US30 (Shares) is 70% and BTC (Crypto) is 40%

The average risk-reward ratio of this strategy for EURUSD (Forex) is 1.66 US30 (Shares) is 1.53 and BTC (Crypto) is 1.81.

The return of this strategy for EURUSD (Forex) is 5.96, US30 (Equities) is 7.71 and BTC (Crypto) is 1.24.

analysis

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Conclusion

In conclusion, the Bollinger Bands divergence trading strategy is a global strategy that works well not only in a trending market, but also in a sideways one. This is due to the characteristic of Bollinger Bands in the strategy that will minimize losses and gain small victories in the secondary markets. This strategy is able to generate profitable results with a good rate of return and a good risk reward ratio. In addition, its ability to filter out negative transactions is an important asset for beginners, as it allows for more steady growth in account size over time. However, it still requires knowledge of price action trading to maximize its potential. In addition, compression of the Bollinger band can often falsify traders when they appear enlarged and then regain their original state. Therefore, the basics in reading price actions are extremely important for beginners who need to understand to avoid various forms of counterfeiting. Ultimately, Bollinger’s band divergence trading strategy is a stable strategy that proves to be reliable in its own way.

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Information

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