Bollinger Band Breakout Trading System

The Bollinger Band Breakout trading system (rules and explanations further below) is a classic trend following system. As such, we included it in our State of Trend Following report, which aims to establish a benchmark to track the generic performance of trend following as a trading strategy.

The Wisdom State of Trend Following reports the performance of a composite index made up of classic trend following systems (Bollinger Band Breakout and others) simulated over multiple timeframes and a portfolio of futures, selected from the range of 300+ futures markets over 30+ exchanges that Wisdom Trading can provide clients access to. The portfolio is global, diversified and balanced over the main sectors.

We publish updates to the report every month, including that of the Bollinger Band Breakout trading system.

The Bollinger Band Breakout System Explained

The Bollinger Band Breakout Trading System was described by Chuck LeBeau and David Lucas in their 1992 book: “Technical Traders Guide to Computer Analysis of the Futures Markets”. The system is a form of breakout system that buys on the next open when the price closes above the top of the Bollinger Band and exits when the price closes back inside the band. Short entries are the mirror opposite with selling taking place when the price closes below the bottom of the Bollinger Band.

The center of the Bollinger Band is defined by an Simple Moving Average of the closing prices using a number of days defined by the parameter Close Average Days. The top and bottom of the Bollinger Band are defined using a fixed-multiple of the standard deviation from the moving average specified by the
parameter Entry Threshold.

The Bollinger Band Breakout Trading system enters at the open following a day that closes over the top of the Bollinger Band or below the bottom of the Bollinger Band. The system exits following a close below the Exit Band which is defined using a fixed-multiple of the standard deviation from the moving average specified by the parameter Exit Threshold.

The value of the Exit Band on the day of entry is used as the stop for the purpose of determining position size using the standard Fixed Fractional position sizing algorithm.

The Bollinger Breakout Trading Syste includes three parameters that affect the entry and exit:

Close Average

The number of days in the Simple Moving Average which forms the center of the Bollinger Band channel.

Entry Threshold

The width of the channel in standard deviation. This defines both the top and bottom of the channel. The system buys or sells to initiate a new position when the closing price crosses the price defined by this threshold.

Exit Threshold

If set to zero, the system will exit when the price closes below the moving average. If set to some higher number the system will exit when the price closes below the given threshold. A negative Exit Threshold means that the exit channel is below the moving average for a long position.

For example, an Entry Threshold of 3 and an Exit Threshold of 1 would cause the system to enter the market when the price closed more than 3 standard deviations above the moving average and to exit when the price subsequently dropped below 1 standard deviation above the moving average.

Your Custom Version of this System

We can provide you with a customized version of this system to suit your trading objectives. Portfolio selection/ diversification, timeframe, starting capital… We can adjust and test any parameter to your requirements.

Contact us to discuss and/or request a full custom simulation report.

Get Your Custom Simulation Report

Alternative Systems

In addition to the public trading systems, we offer to our clients several proprietary trading systems, with strategies ranging from long-term trend following to short-term mean-reversion. We also provide full execution services for a fully automated strategy trading solution.

Please click on the picture below to see our trading systems performance.

Trading Systems - Wisdom Trading

CFTC-required risk disclosure for hypothetical results

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.