Strategy with Bollinger bands and pattern 1-2-3
Next we will explain a trading strategy that combines the use of Bollinger bands and the pattern 1-2-3, both for upward movements and bass. This is a simple strategy as we will see below, however it requires the mastery of a number of theoretical concepts that we will explain below.
The maximums 1-2-3 originating in the upper Bollinger band or in the line of the moving average (central line of the Bollinger bands) and the minimums 1-2-3 that are produced in the band Bollinger Inferior or in the line of the moving average, they offer excellent signals that indicate possible changes of direction in the market. Because the 1-2-3 pattern is produced in virtually all markets and in any time frame, this technique can be applied to operate on a wide variety of instruments and time frames, including short, medium and long term.
It works well in any interval of time and market that is sufficiently dynamic to oscillate from one side to the other while in tendency, or to oscillate with sufficient volatility within a price range to generate good opportunities.
For example, we can see the pattern 1-2-3 in combination with Bollinger bands (standard configuration) in a chart that shows a clear bearish trend:
In the previous image we can notice the following:
Most of the 1-2-3 patterns are kept within the Bollinger bands.
The 1-2-3 pattern is completed near the top Bollinger band or near the moving average of 20 indicator periods.
The arrows indicate the entry points to the market, which are below the point 3 of the pattern 1-2-3. In this case, these entry points are located a little earlier than recommended by the classic strategy to operate with these pricing guidelines. In other words, this system uses Bollinger bands to generate an early entry to the market based on the 1-2-3 pattern.
1-2-3 pattern Detection in Metatrader 4
In the following article you can download two custom flags designed to display patterns 1-2-3 in Metatrader 4 pricing charts. At the moment there are no similar developments for MT5.
Rules of the system
The rules of the system are quite simple. The only difficulty I see is that practice is needed to identify pattern 1-2-3. It is not as easy as it may seem, although once the trader gets used to it, you can find these formations with a simple glance at the charts.
In a bear market, the price must reach or surpass the upper Bollinger Band, or the price must reach or exceed the 20-period moving average before the 1-2-3 formation becomes a legitimate pattern from Which can enter the market according to the classic rules of this price pattern.
In a bullish market, the price must reach or surpass the lower Bollinger Band, or the price must reach or exceed the 20-period moving average before the 1-2-3 formation becomes a legitimate pattern from Which can enter the market according to the classic rules of this price pattern.
The entrance will produce 2-3 bars after point 3 of the formation. This depends to a great extent on the risk tolerance of the trader. The earlier it enters the market after point 3, the greater the risk as the pattern is not yet fully confirmed.
For the closing of the positions the following criteria can be applied:
O Stop loss: For a bullish trend, the stop loss is placed below point 3 of pattern 1-2-3. For a bearish trend, the stop loss should be located above point 3 of the pattern. With respect to the stop loss level with respect to point 3, depends on the time frame used, for example in short term intervals, stop loss is recommended that do not exceed 10 pips of distance in relation to point 3.
O Profit-taking: Sometimes, from a 1-2-3 pattern, strong moves can occur, so trailing stops that follow the price could be used. Another option is to place a profit-taking objective at a significant support or resistance level, or at levels determined by pivot points or Fibonacci levels. The trader can also wait for a 1-2-3 pattern to occur in the opposite direction of the position, although it should be remembered that these patterns may be the beginning of trend changes.
Examples of the trading system with Bollinger Bands and the pattern 1-2-3
The above image shows several examples of trading signals generated by this system. The entry points are shown by black arrows. In all cases, those taking a 1-2-3 pattern in which point 3 is close to the upper / lower Bollinger Band or near the moving average of the indicator are taken as signals. In some cases, the trader waits for the price to pass through the moving average or goes directly into the 2-3 candela. This of course depends on the trader's experience and his tolerance for risk.
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