High Profits Double Bollinger Band, MACD, Stochastic Crossover Forex Strategy
For any forex trader actively trading the markets, it’s always critical to know what the ongoing trend is, and at least equally so important (if not more) is whether or not a trend exists at all or not at a particular time.
This strategy is designed to give all of this precise information based on which any trader can make a better, more informed and more profitable trading decision.
We are going to use three popular technical indicators to trade this system:
- Bollinger Bands
However, we are going to use them in a special kind of way. Essentially in a way where each of them confirms the signal from the other indicators and therefore hugely stacking the probabilities in our favor.
Of course, as always we can add support and resistance to further enhance the system.
Specifically for this strategy, the parameters used for the indicators are as follows:
- Stochastic period: 5, 5, 3
- MACD periods: 12, 26, 9
- Double Bollinger Band – both of period 20
The deviation of one Bollinger Band (BB) is 2 while for the other is 1. In our examples here on the charts, the black BB is with the standard deviation of 2 while the blue BB is with the standard deviation of 1.
- If there is no native option to add a double Bollinger Band in your trading platform you can always add 2 BBs where one is with a standard deviation of 1 and the other is with a deviation of 2. Entry rules: Price needs to cross and trade inside of the upper bands (in an uptrend) or inside of the lower bands (in a downtrend).
- The stochastic indicator should be pointing to the same direction of the trend as the Bolinger Bands (so it should be bullish when there is the bullish signal of the BB). Preferably the crossover on the stochastic occurs from oversold or overbought levels.
- The final confirmation is with the MACD which should also show the same signal (if Bolinger bands and Stochastic are bullish, MACD should show a bullish crossover as well).
- A “same time crossover” on all 3 indicators creates a higher probability of success and it is preferred that most of the entries to be done under these circumstances.
It’s also wise that before triggering the entry you switch and look at the lower timeframes to try and pinpoint a better entry price. Often times Price Action patterns on lower timeframes will give a chance for a better entry.
In the following example on USDCAD, a same time crossover signaled the start of a nice uptrend that yielded almost 200 pips with this strategy.
An example of a "same time" cross on all 3 indicators
- Stop-Loss Placement: The initial stop loss is placed behind the band with a deviation of 1 (inside Bolinger band). So, below the band in an uptrend and above the band in a downtrend. The charts below will make this more clear.
- It’s OK if price pierces the inside band but doesn’t close past it.
- The trade is closed only when price closes outside of the bands.
- Note that some trading platforms don’t have a native option for a stop on a close, so an Expert Advisor might be useful in some cases.
In this USDJPY example, the Stochastic and the MACD started to turn before the price closed outside of the band. This is a common occurrence and helps to confirm that the trend is near exhaustion.
An example of a short entry and exit on USDJPY 4h chart
- Managing the Opened Trade, Trailing the Stop-Loss: There are no profit targets – only managing the stop-loss.
- Maximum profits are captured by trailing the stop-loss behind the band.
- When the price goes out of the bands the trend has ended and therefore the trade is closed.
- Of course using profit targets based on higher timeframes is a wise thing to do as well.
- We also exit if Stochastic and MACD both crossover even though price didn’t close outside bands. This is a precautionary tactic to protect profits. One way to do this is to close a part of the position and let the other one run if you believe that the trend will continue.
- It’s not a big issue if the price trades outside of the two bands for a brief time. However, keep in mind that it can also indicate overbought or oversold market conditions. Depending on the context in which it appears it can be traded accordingly.
For example, if it appears at a support or resistance level then it should be looked at carefully as a reversal is much more likely. On the other hand, if there is no support, resistance or other obstacles then it can be false and not much significant. The ongoing trend will probably continue.
Combining resistance with this strategy – EURUSD 4h chart