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)