just been going through my old DaliyFX (FXCM) emails.
noticed an interesting and simple strategy.
Bollinger Bands ( standard setting 21,2)
ADX (standard setting 14 )
use on hourly for example.
if the ADX is below 25 and flat or declining, then use boll-bands as reversal points ( ranging )
if the ADX is above 25 and rising, then boll-bands are likely to show breakout point ( trending ). ( perhaps use central line as entry )
seemed a nice simple idea. 🙂
EDIT: full text below. ( the link to the FXCM site shows "no longer available", so I cant post it.
Selective Trading: Bollinger Bands & ADX
Our mission as traders is to put our trading capital to work, only under the ideal circumstances, when the probabilities of success are skewed very much in our favor. We should consider our trading capital limited, and always very precious. If we are not selective enough in our analysis, we may be tempted to find a reason to enter the market at any given time, regardless of the current conditions. How many times have we anticipated the market to breakout to new highs or lows, only to see the current range to simply continue? In order to eliminate the risk of over-trading, we should develop some sort of scanning criteria that will force us to sit out much of the market noise, and maintain the conviction to enter the market, when the probabilities are in our favor. One way to do so is through the correct application of multiple indicators. Each technical indicator we use simply provides us with a way to view the market from a certain perspective. Each perspective may be somewhat narrow, however the greater amount of indicators that tell the same story, can significantly improve our overall chances of success.
With this in mind, let's take a look at two commonly used technical indicators; Bollinger Bands and ADX. The Bollinger Bands indicate an area where the market has certain likelihood to trade. Set at a 2-standard deviation, statistically around 95% of the market's trading activity ‘should' take place within the two bands. Therefore when the market breaks above or below either band, traders may choose to ‘fade this move' or in other words, enter the market with the assumption it will fall back inside its current range; buy lows and sell highs. However if the market does break out of the Bollinger Bands, a new trend may very well have started. So the question remains, if the market breaks above or below one of the Bollinger Bands, how we may determine if this break will lead to a new trend, or if the market will simply regress back to the mean. This is where the ADX can add significant value. The Average Directional Index measures the inherent strength of the trend. Although there are a number of different ways to apply this indicator, I prefer to use the ‘25' level as our key barrier. Readings below 25 may indicate a weakness in the current trend, as the market stands a very small chance that a new trend will develop, and the market will continue to either higher highs, or lower lows. With this in mind, any market spike outside either Bollinger Band may be faded, with the assumption the current range will continue. On the other hand, if the market breaks out of the Bands, as the ADX crosses above ‘25', traders may interpret this as a sign of increasing strength, as they may buy new highs or sell new lows. In other words, we should buy the breakout, only when the ADX confirms the same move, otherwise, fade the market extremes.