Forex trading strategy 8. Trend bouncer strategy

STRATEGY 8: TREND BOUNCER STRATEGY

The trigger of a trend can be anything from a political decision, to a central bank policy announcement, to the discovery of new resources, to a myriad of other possibilities. Trends move like waves in that they ebb and flow.
In an uptrend, you will find that, at a certain point in time, prices will pull back or retrace before continuing with the upward movement. Similarly for a downtrend, prices will retrace upward against the downward momentum before continuing their way down again.
This ebb-and-flow movement frustrates many trend traders, because
these retracements often stop out their trades while the market moves in their direction again later.
Experienced trend traders usually wait for the retracement to happen before taking a trade in the direction of the trend. This is how the trend bouncer strategy came about. The Bollinger Bands indicator provides an objective way of identifying the ebb-and-flow movement of a trend.
Since this is a trend strategy, we have more than one profit target.
In fact, we have three specific profit levels for this strategy. The strategy differs slightly from the trend rider in that there are specific levels for trend bouncer traders to exit with profits.

Time Frame

The trend bouncer method works with the hourly (H1) or 4-hourly (H4) chart. This means that each candle on the chart represents 1 hour or 4 hours of price movement respectively.

Indicators

We use these indicators for this strategy:
1. Bollinger Bands (moving average [MA] 12, deviation [Dev] 2)
2. Bollinger Bands (MA 12, Dev 4) Currency Pairs

This strategy is suitable for all currency pairs listed on the broker’s platform, especially the seven major currency pairs of:
EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD

Strategy Concept

With the help of the Bollinger Bands, we can objectively identify the ebb-and-flow movement of a trend. When the candlestick hits the upper band of Bollinger Bands (MA 12, Dev 2), it indicates an upward momentum, and we prepare to go long. As prices retrace back to the MA 12 (the center line of the Bollinger Bands), a significant retracement has occurred, and it is a good time to enter for a long trade.
When the candlestick hits the lower band of the Bollinger Bands (MA 12, Dev 2), it indicates a downward momentum, and we prepare to go short. As prices retrace back to the MA12 (the center line of the BollingerBands), a significant retracement has occurred, and it is a good time to enter for a short trade. This trend strategy exits at three different targets.

Long Trade Setup

We use the GBP/USD on the H4 time frame to illustrate a long trade. Here are the steps to execute the trend bouncer strategy for long:

1. Wait for the price to hit the upper band of the first Bollinger Bands (MA 12, Dev 2) and retrace back down to the center MA 12. (See Figure 8.10.)
2. When the price touches MA 12, enter for a long. (See Figure 8.11.)
3. The stop loss is the lower band of the second Bollinger Bands (MA 12,Dev 4). (See Figure 8.12.)
4. The trade will have three profit targets with risk to reward ratios of 1:1, 1:2, and 1:3 respectively. (See Figure 8.13.)

TREND BOUNCER STRATEGY

TREND BOUNCER STRATEGY

Forex trading strategy

Forex trading strategy

FIGURE 8.10 Price Hits Upper Band of First Bollinger Bands (MA 12, Dev 2) and
Retraces Down to the Center MA 12
FIGURE 8.11 Price Touches MA 12
FIGURE 8.12 Set Stop Loss and Profit Targets
FIGURE 8.13 Trade Hits Profit Targets

From the long example in Figure 8.13:

Entry price = 1.5334
Stop loss = 1.5244
Profit target 1 = 1.5424
Profit target 2 = 1.5514
Profit target 3 = 1.5604
The risk for this trade is 90 pips, and the reward is 270 pips if all three
targets are hit. The risk to reward ratio is 1:3, which yields a tidy 9% return
if we take a 3% risk.

Short Trade Setup

We use the NZD/USD on H1 time frame to illustrate a short trade. Here are
the steps to execute the trend bouncer strategy for short:

1. Wait for the price to hit the lower band of the first Bollinger Bands (MA 12, Dev 2) and retrace back up to the center MA 12. (See Figure 8.14.)
2. When the price touches MA 12, go for a short. (See Figure 8.15.)
3. The stop loss is the upper band of the second Bollinger Bands (MA 12, Dev 4). (See Figure 8.16.)
4. The trade will have three profit targets with risk to reward ratios of 1:1, 1:2, and 1:3 respectively. (See Figure 8.17.)

From the short example in Figure 8.17:

Entry price = 0.8214
Stop loss = 0.8260
Profit target 1 = 0.8168
Profit target 2 = 0.8122
Profit target 3 = 0.8076

Forex trading strategy

TREND BOUNCER STRATEGY

Forex trading strategy

Forex trading strategy

The risk for this trade is 46 pips, and the reward is 138 pips if all
three targets are hit. The risk to reward ratio is 1:3, which yields a tidy 9%
return if we take a 3% risk.

FIGURE 8.17 Trade Hits Profit Targets

Strategy Roundup

Understanding how trends move in ebbs and flows allow traders like you and me to identify the direction and timing of our entries. We enter during the “ebb” and let the “flow” ride us to our profit targets.
Unlike the trend rider strategy, the trend bouncer strategy has three predetermined profit targets. Traders who like to bank in profits in various stages prefer this strategy. The strategy is rooted in trend trading. With a momentum indicator like the Bollinger Bands, you will greatly increase your odds at being profitable in the long run.
Remember that smart money typically follows the trend. This strategy helps us to hop on board early when we identify the trend.