THE BOLLINGER BAND BREAKOUT SYSTEM EXPLAINED
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 SYSTEM INCLUDES THREE PARAMETERS THAT AFFECT THE ENTRY AND EXIT:
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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. -
CLOSE AVERAGE
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.
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