Particle Swarm Optimization of Bollinger Bands. October 27, at 3: Kamel — would you please look at the candle EURUSD for — if this were traded, and it seems to comply with the system — except that candle 1 closed below the BMB , then it would be stopped out — would you please advise what you would do? Indicators links are at the end of the post. HI Kamel Another confusion. Please read the below comments.
How to Spot and Trade Bullish and Bearish Divergence Patterns. Momentum Indicator + Bollinger Bands. Download the short printable PDF version summarizing the key points of this kalmarsunqdhotel.tk Here to Download. Conclusion. A divergence setup is a leading Forex pattern, giving us an early entry into emerging price moves.
Determining Breakout Direction
Financial traders employ these charts as a methodical tool to inform trading decisions, control automated trading systems , or as a component of technical analysis. Bollinger Bands display a graphical band the envelope maximum and minimum of moving averages , similar to Keltner or Donchian channels and volatility expressed by the width of the envelope in one two-dimensional chart.
Two input parameters chosen independently by the user govern how a given chart summarizes the known historical price data, allowing the user to vary the response of the chart to the magnitude and frequency of price changes, similar to parametric formulas in signal processing or control systems. The chart thus expresses arbitrary choices or assumptions of the user, and is not strictly about the price data alone. Typical values for N and K are 20 and 2, respectively.
The default choice for the average is a simple moving average , but other types of averages can be employed as needed. Exponential moving averages are a common second choice. Bollinger registered the words "Bollinger Bands" as a U. The purpose of Bollinger Bands is to provide a relative definition of high and low prices of a market.
By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions.
In Spring , Bollinger introduced three new indicators based on Bollinger Bands. Bandwidth tells how wide the Bollinger Bands are on a normalized basis. Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:. Uses for bandwidth include identification of opportunities arising from relative extremes in volatility and trend identification.
The use of Bollinger Bands varies widely among traders. Some traders buy when price touches the lower Bollinger Band and exit when price touches the moving average in the center of the bands. Other traders buy when price breaks above the upper Bollinger Band or sell when price falls below the lower Bollinger Band.
When the bands lie close together, a period of low volatility is indicated. Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline.
If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. In , Lento et al. The authors did, however, find that a simple reversal of the strategy "contrarian Bollinger Band" produced positive returns in a variety of markets.
Similar results were found in another study, which concluded that Bollinger Band trading strategies may be effective in the Chinese marketplace, stating: A recent study examined the application of Bollinger Band trading strategies combined with the ADX for Equity Market indices with similar results.
A paper from uses Bollinger Bands to reduce variance in a Monte Carlo simulation used to forecast the Canadian treasury bill yield curve. In , Butler et al. It simply gives more opportunities than the MACD.
However, since the signals can be more frequent, many of them might be false signals which need to be filtered out. Have a look at the image below. There are two divergences on the chart, which gives an opportunity for two trades.
We start by analyzing the first case. We observe higher tops on the chart, while the Stochastic Oscillator creates lower tops. The price starts decreasing afterwards. However, the Stochastic suddenly starts closing with higher bottoms.
This is the second divergence pattern. The Relative Strength Index is another good indicator to build a successful Forex divergence system. The RSI indicator consists of a single line, which moves between an overbought and oversold zone.
In this manner, the RSI has a leading character. It is an oscillator like the Stochastic. Therefore, it is a good tool for spotting divergences on your chart. If you spot the pattern, it will provide for an early entry signal for your trade. The image below will show you how to trade divergence with the RSI indicator. At the bottom of the chart you see the Relative Strength Index indicator. The chart shows lower bottoms, while the RSI shows higher bottoms.
We will use the Momentum Indicator to spot divergence with the price action. However, we will enter trades, only if the price breaks the Moving Average of the Bollinger Bands and the bands are expanding at the same time. This way we will get confirmation for our signals and we will enter trades only during high volatility.
We will exit our trades when the price crosses the Moving Average of the Bollinger Bands in the opposite direction. This is how this strategy works: At the bottom of the chart you see the Momentum Indicator.
On the price chart you see the Bollinger Bands overlay in green. After a period of price increase, the Momentum Indicator starts recording lower top while price is making higher highs. This is a bearish divergence between the price action and the Momentum Indicator. Then, we see a large bearish candle, which breaks the Moving Average line between the bands. At the same time, the Bollinger Bands start expanding, indicating higher volatility. The short trade in this case could have been closed out when price breaks the Moving Average of the Bollinger Bands in bullish direction.
The proper location of a stop loss order in this trade should be above the last top of the price action prior the price break at the center Bollinger band line. As you can see the risk was very nominal in relation to the overall profit that could have be realized from this trade. We have discussed the types of divergence patterns and some reliable indicators to trade divergence with. Now we know how to spot divergence and how to enter the market on a divergence.
However, before you start trading divergence setups, there are a few more points which we need to discuss further. These things include an example money management approach when trading divergence setups.
If you do not have a sound money management plan you are likely to lose money trading divergences or any other setups for that matter. Regardless of the trading method you use, you should always use a Stop Loss order for each of your trades. It is no different when you trade divergences. And for most traders, it is best to place a hard stop in the market instead using a mental stop. As far as the divergence setup goes, one way to place your stop loss would be put it right above the last top on the chart, which confirms the bearish divergence.
If the divergence is bullish, then we rely on bottoms and the stop should be placed below the last bottom on the chart. The image below will give you an idea of where to put your stop loss when trading divergence.
This created an opportunity to enter the market with a long trade at 0. The stop loss location would be below the swing low, right below the last bottom of the divergence pattern.
You should always have strict take profit rules when trading divergence. For all the positives of trading divergences, one of the things that divergence trading does not offer us, are clear targets.
Therefore, an additional tool should be used in order to select your profit targets. Typically, If you trade divergence with RSI or Stochastic, you may need an additional indicator to close your trades. However, if you use the MACD, then you could fully rely on this indicator alone. The reason for this is that the MACD is a lagging indicator and it is a good standalone tool for exits as well as entries.
My preferred method is to use swing analysis and and support resistance levels for trade management and profit target setting, however, as I have just mentioned, the MACD is also a viable option. We have all the tools that we need into order put a Forex divergence trading plan together. We will use the MACD indicator for spotting divergence and for closing trades. When we see discrepancies between price action and MACD, we will enter trades based on a divergence signal.
When we see an MACD crossover in the opposite direction, we will close our trades. However, this time we have included our entire trading strategy here. We first start by spotting a bullish divergence between the MACD and the price action. The chart shows lower bottoms, while the bottoms on the MACD are increasing. This is our bullish divergence.
Learn a simple day trading strategy using Bollinger Bands and MACD by Markus Heitkoetter. Two indicators and two steps to profit from intraday trends. the day here. However, this higher high coincided with a lower high on the MACD histogram. This occurrence is a bearish divergence, a warning sign for reversal. This bearish divergence set an. STRATEGY SUBMISSION: Bollinger Band Divergence Strategy. Here is a nice visual strategy that works on all pairs and in any timeframe. It uses only the Bollinger Bands; I use a 2, 16 setting. Bollinger Bands Divergence:whenever a divergence occurs (as indicated by the indicator), enter a trade in direction suggested by the divergence, with no SL, and TP at the opposite outer band of Bollinger Bands.