%b Systems

One of the many cats we have here on the farm knocked over my external hard-drive. While it was on. And now it sounds kind of like how it would if you ran over a roller-skate with a lawn mower.

I took it to the computer doctor, who plugged it in, heard the sound, and told me there was no chance to recover anything from it. And charged me $22.

Fortunately I had been using it generally only for backup purposes, so I didn't lose anything. Well, I didn't lose much. I also used it to store my Thinking Stuff databases, with all the Gain Capital data plugged in, and some pretty useful trading systems. I can re-load the data. But the systems??

Here's where not keeping good trading systems to yourself pays off. If ever your cat knocks over your external hard-drive.

I'd sent the details of a couple of seemingly good systems to one of my customers. So I had them in a separate Excel file sitting on my desktop and not on the external drive.

So here they are. I'd appreciate comments. Or any profit-improving alterations. Of course you'll be using these at your own risk.

These 2 are both based on %b. %b is a single line whose value is determined by where the closing price is in relation to the upper and lower Bollinger lines.

When the close is exactly at the lower line, %b equals 0. Below the lower line, %b is negative. When the close is exactly at the upper line, %b equals 1. When it's exactly in the middle, %b equals 0.5. And so on.

It's very rare for %b to be lower than -0.3, or higher than 1.3.

The way Bollinger Bands are constructed, the price moves from the lower band, to the upper band, and back to the lower band. The problem is that the Bands aren't static. Just because the price moved from the lower band to the upper band, it doesn't necessarily mean that the price is rising - the upper band might have come down to meet the falling (or stagnating) price.


%b System #1

Here's a system which attempts to use this knowledge. It was tested on 5 Minute bars and seemed to do quite well. However it was only a couple of months of prices, so please backtest thoroughly before use. In particular, using a %b value of 0.1 for Longs and 0.8 for Shorts might need to be changed. As might the percent to be added to or subtracted from the Close price for the Stop Loss settings.

All Bollinger settings used a period of 720, with 2 standard deviations above and below.

Rule Type	Description
Long - Entry Rules	Value of %b Is Below X (0.1)
Long - Entry Values	Price Where %b Would Equal X (0.1)
Long - Init. S/L Values	Close Minus X (0.3) Percent
Long S/L Mgmt Rules	Every Bar
Long S/L Mgmt Values	Close Minus X (0.3) Percent

And for shorts:

Rule Type	Description
Short - Entry Rules	Value of %b Is Above X (0.8)
Short - Entry Values	Price Where %b Would Equal X (0.8)
Short - Init. S/L Values	Close Plus X (0.5) Percent
Short S/L Mgmt Rules	Every Bar
Short S/L Mgmt Values	Close Plus X (0.5) Percent

%b System #2

Instead of only using a trailing stop, this sytem also attempts to lock in a bunch of profit if the price has moved a fair distance in our favour.

For longs, initially the stop loss is set to the lower Bollinger line (where %b equals zero). The stop loss is then kept at the same level as the lower Bollinger line every bar after entry (remembering that the stop loss will never go down, however). But, if %b ever gets above 0.8, then the stop loss is moved up to where %b would equal 0.8. And from then on, the stop loss is kept where %b would equal 0.8.

All Bollinger settings used a period of 288, with 2 standard deviations above and below. Directional Movement System period was 14.

Rule Type	Description
Long - Entry Rules	ADX Is Below Both +D and -D
Long - Entry Rules	Value of %b Is Below X (0.2)
Long - Entry Values	Price Where %b Would Equal X (0.2)
Long - Init. S/L Values	Price Where %b Would Equal X (0.0)
Long S/L Mgmt Rules	Every Bar
Long S/L Mgmt Values	Price Where %b Would Equal X (0.0)
Long S/L Mgmt Rules #2	Value of %b Is Above X (0.8)
Long S/L Mgmt Values #2	Price Where %b Would Equal X (0.8)

And for shorts:

Rule Type	Description
Short - Entry Rules	ADX Is Between +D and -D
Short - Entry Rules	Value of %b Is Above X (0.8)
Short - Entry Values	Price Where %b Would Equal X (0.8)
Short - Init. S/L Values	Price Where %b Would Equal X (1.0)
Short S/L Mgmt Rules	Every Bar
Short S/L Mgmt Values	Price Where %b Would Equal X (1.0)
Short S/L Mgmt Rules #2	Value of %b Is Below X (0.2)
Short S/L Mgmt Values #2	Price Where %b Would Equal X (0.2)

These and a couple of other objective trading systems can be found on my Trading Systems For Free page.