12# Bollinger Bands and Fibonacci Retracement Trading System

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This strategy is based on three swing highs and lows (a swing high has at least one lower high immediately before and after it; a swing low has at least one higher low immediately before and after it). Since the strategy's rules for long and short positions are analogous, we'll just introduce the long side here. For a long position, this strategy first identifies a swing low (point 1), a swing high (point 2), and a swing low (point 3) between points 1 and 2 [Figure , long setup].

Bollinger Bands are overlaid on the price chart to help locate points 1 and 2. For both the long and the short setups, points 1 and 2 must be outside the bands; point 3 must be inside the bands.

Also, point 3 must retrace between 38.2% and 61.8% (Fibonacci retracement levels) of the price swing between point 1 and point 2 . With the setup in place, our strategy uses points 1, 2, and 3 to calculate an entry price, initial protective stop, trailing stop, and two price targets [Figure ]. The strategy's setup, trigger, orders, and exits are described next.



Long and Short Setups

a) The setup to buy requires a price move from a swing low (point 1) to a swing high (point 2) and a retracement to a swing low (point 3).

b) The setup to sell requires a price move from a swing high (point 1) to a swing low (point 2) and a retracement to a swing high (point 3).

Long and Short Triggers

a) The trigger for a long position is a resumption of the up move to the following level: subtract point 1 from point 2, divide the difference by 2, and add the result to point 3.

b) The trigger for a short position is a resumption of the down move to the following level: subtract point 2 from point 1, divide the difference by 2, and subtract the result from point 3.

 

Long and Short Exits

a) If long two units, exit both at the initial protective stop or exit one unit at target 1 and one unit at either the trailing stop or target 2, whichever is hit first. (The initial protective stop is at point 3 minus one point. The trailing stop, which is activated after a close at point 2 or higher, is calculated as follows: Find the highest close since entry and subtract 25% of the difference between point 1 and point 2. Target 1 is calculated as follows: add point 3 to target 2 and divide the total by 2.

Target 2 is calculated as follows: add point 2 to point 3 and subtract point 1 from the total.) b) If short two units, exit both at the initial protective stop or exit one unit at target 1 and one unit at either the trailing stop or target 2, whichever is hit first. (The calculations for the initial protective stop, the trailing stop, target 1, and target 2 are analogous to the calculations for the long side).

 

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