Welcome to Forex Backtest Friday, a new post series where I share the backtest results of the market tendencies I investigate.
This week, we'll take a look at the classic Bollinger bounce.
The idea behind it is that after bouncing off the upper or lower Bollinger band, there is a tendency for prices to move back towards the middle of the Bollinger band channel.
Is there really such a tendency?
To test this, I coded an expert advisor and ran backtests across the 28 currency pairs from Jan 2009 to May 2020.
Bollinger band setting:
- Moving average period: 20
- Standard deviations: 2
Sell setup criteria (reverse for buy setup):
- Setup candle = Candle with top shadow crossing the upper Bollinger band
- The Setup candle must close below the upper Bollinger band
- The range of the candle before the Setup candle must be fully below the upper Bollinger band
Sell trade parameters (reverse for buy trade):
- Upon Setup candle close, enter a sell trade
- Stop loss = 1 pip above the Setup candle
- Profit target = same as the stop loss allowance (1:1 risk-reward)
*Note: This is not a proper trading strategy. I'm using only the most basic (crude) parameters to test for a mean-reversion tendency following a bounce off the Bollinger bands.
- Test period: 1 Jan 2009 - 31 May 2020
- No trades to be taken within 1 hour of market open
- Maximum 1 trade per currency pair, per day
- Trading costs are not considered
Here are the results of the backtest (click to view):
*Note: These results do not account for trading costs, so ignore the net profit/loss amounts. These backtests are designed to only measure the Bollinger bounce tendency (i.e. win rate).
And here's the summary of the backtest:
The average win rate is approximately 50% on both the 1 hour and 4 hour charts.
So the result is quite clear: There is no observable edge to the Bollinger bounce. Prices are just as likely to move up or down following a "bounce" off the Bollinger bands.
This is quite a surprising result to me, as I've seen many people base their trading strategy on such Bollinger "bounces" over the years.
The data, however, says that the winning probability is no better than that of a coin flip!
This is the first of the Forex Backtest Friday series of posts. How are you liking it so far? Would you like me to keep publishing my backtest results?
Is there anything you'd like me to add or remove from future backtest reports?
What effects/technical indicators should I test next?
Let me your thoughts in the comments section below.