TC2000 Bollinger Band Breakouts
One of the more common trading scans used by traders is a Bollinger Band breakout. Similar to my Donchian Daily Breakout system, I have set up a TC2000 Bollinger Band Breakout scan that looks for stocks that have hit or crossed the upper band.
The inspiration for this scan primarily came from Nick Radge and his book, Unholy Grails – A New Road to Wealth. In Nick’s book he outlines a strategy with some very simple rules, but an interesting adjustment that makes it a bit different than other strategies out there.
In this post I will outline that strategy and then discuss my tweaks to fit more with my style and beliefs.
Nick Radge’s Bollinger Band Breakout Strategy
The traditional Bollinger Band setup uses a 20-period moving average with a standard deviation of 2.0. This means that the average price for the last 20 days is plotted, and then an upper and lower channel is calculated 2 standard deviations away from that moving average. Here is what a traditional Bollinger Band set up looks like on Apple:
Radge has done something different which I like. Rather than trade a Bollinger Band strategy like everyone else does, he has changed the parameters of the bands.
Instead of using 2 stand deviations from the 20 day moving average, he does the following:
- The moving average length is 100 days.
- The top band is drawn with 3 standard deviations from the moving average line.
- The bottom band is drawn with 1 standard deviations from the moving average line.
This creates a different view of the price action which might provide an additional edge. Here is Apple once again but with the setup as per the above bullets:
As you can see, the top band is wider, making it much tougher to hit that top band. The stock or ETF needs to have at least 100 days of solid momentum, with a strong push to make it break that top band.
On the bottom end, which is the sell signal as you will see in a moment, the line is much closer meaning that sells happen quicker. More on that right away!
Nick Radge’s Bollinger Band Breakout Rules
The rules for the trading strategy is very simple. Here are Nick Radge’s steps from the book:
- Buy the stock or ETF next day at the open after the stock pierces the upper Bollinger Band (as set up with the 100 day moving average and 3 and 1 standard deviations).
- Sell the stock or ETF next day at the open after the stock punctures the lower Bollinger Band.
That’s it. Nick did a bunch of backtesting on the system and presented this table in the book:
XAOA is a Australian market, but the results are obviously really strong. The system does have a high maxDD which is worrisome, but that is compensated with a high return. Traders need to be very aware of that and comfortable with how this system performs.
The TC2000 Bollinger Band Breakout Rules
One of the issues I ran up against when using just the above rules, was that I was getting stocks and ETFs back from the TC2000 scan that have had multiple breakouts in the past few days. I wanted to see stocks that had their first day of the breakout so I could be in the trade earlier, rather than after a few days of big price movement.
Here is an example of what I mean. In this chart for SODA, you can see a huge up move taking the stock above the upper band, which has been in place for a few days. I would have much rather caught this earlier in August to ride that trend up!
In addition, I also wanted to make sure I was only uncovering stocks that have had a positive uptrend. In other words, I wanted to look for stocks that were breaking out after strong gains already. To do that I used a rate of change filter which allowed me to sort stocks that the scan found from highest 90 day rate of return to the lowest.
With those rules in mind, here is what the scan looks like in TC2000:
From there, I have set up scans to make sure the price has been below the top Bollinger Band over the past ten days. This ensures that the stocks identified have not had a upper band pierce in the past ten days.
An Example Stock Identified
When I ran the scan this weekend, one stock that was identified was Dollar General Corporation (DG). It was not a huge pierce, but it pierced the upper band nonetheless. Based on Radge’s rule, this stock would be purchased and held until it brakes the bottom Bollinger Band.
The TC2000 Bollinger Band Rules
As a summary, the rules of this trading strategy are as follows. I am going to keep an eye on this one to see how it performs on paper and if I can actually trade it. If so, then I may just add it to my trading systems.
- Set up TC2000 scan to identify stocks that meet the following conditions:
- Price has closed today above the top Bollinger Band set at 100 with a standard deviation of 3
- Volume is > 100,000
- Price is > $5
- Price has closed below the top Bollinger Band for the past 10 days prior to the breakout day
- Set position size as 1.0% of account with a 7% max loss.
- For stocks that are identified on the scan, buy at the open following the day of the top Bollinger Band Breakout.
- Sell the stock when it closes below the bottom Bollinger Band, which has been set at 100 with a standard deviation of 1
That’s the system. Pretty simple.
If you trade a similar system, or have any recommendations then please let me know in the comment box below.
- Do you trade a Bollinger Band breakout system?
- What are your trading rules for the strategy?
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