Trade Plan: Bollinger MA Trigger I know, you see a sharply falling (or rising) market that looks like the final death spike. You’re thinking, wouldn’t this be a great counter trend trade? Oh boy, how many times do I have to keep telling traders to stop catching those falling knives. So you can’t resist, ok, but at least let’s do this with a little intelligence. Check out the following Trade Plan: Bollinger MA Trigger. It just might help your hands getting cut off.
Description: The basic strategy here is to catch a market reversal, but only after price has confirmed that a trend reversal is occurring. There are two Bollinger Band (BB) indicators used in the Trade Plan. Both of 20 moving average (MA) where one is with a standard deviation of 2.0 (the outer band) and then a standard deviation of 0.8 (the inner band). The following are the 3 successive set-up conditions before the Trigger:
- Look for a falling market where at least 8 bars are riding the lower inner or lesser BB.
- Then when the market reverses, ensure that price returns to above the inner upper BB.
- Finally the retest back to the inner lower BB, so long as it does not break lower than at set-up point 1. You are now ready to see if the Trigger hits.
Now follow along the chart graphic provided as we describe the specifics using the Long case (opposite true for a Short case) for the after set-up conditions.
Trigger: After the third set-up point and after price moves beyond the upper inner BB.
Target: Two times the Stop.
Stop: At the low after the third set-up point.
Order Management: The PSR (Profit Stop Ratio) should be 2 to 1. The suggestion is to use limit order for entries at the Trigger point.
Filter: Always trade in the direction of the 20MA. You may also avoid this pattern during quite market times and news events.
One could consider using this on the 15 minute or the 1-hour charts, though other time series could also be considered if the risk amount of the Stop matches your risk budget tolerance. Please click here or see below for a video presentation of the Trade Plan.
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