Using Bollinger Bands ® – Part 2

Filed under: Learn Forex Trading |

In part 1 of this article, I explained a little bit about Bollinger Bands and two of the ways in which traders use them. One was to go long at the break of the upper band, and to exit when price returns to the moving average; and to go short at the break of the lower band, and to exit when price returns to the moving average. The other was to go short at the break of the upper band, and to exit at the moving average; and to go long at the break of the lower band, and to exit at the moving average. A bit of a mouthful I know, but I think you get the picture.

 

With a lack of empirical studies done in this area, I have done a brief pilot study to try to assess which of these method may be the most profitable (if any). So I created two expert advisors with the two different parameters, and gave them a quick test on the EUR/USD 4-hour chart since 2000. The Bollinger Bands had a simple moving average of 350 and a standard deviation for the upper and lower bands of 2.5. The results were as follows…

 

Figure 1.

For the first expert advisor, that is, the system of going long at the break of the upper band, the results were very positive (see Figure 1.).* As you can see, although there are relatively few trades with just 45 trades over a period of twelve years, there are some nice steady profits. There was around a 25% rise on the bank, with only a 6% maximum drawdown. Therefore the position sizes could have been increased by five to give a 125% rise on the bank, and a 30% maximum drawdown. Whether this system would be profitable on any forex pair remains to be seen. However, it does demonstrate that Bollinger Bands do provide traders with some kind of edge.

 

*The second expert advisor carried a large loss.

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