Rubber Band Trading Strategy - When Flat is Your Friend
Despite the fact that 70% of the time the market is in a flat state, most strategies for Forex trading are trending. Thus, ignoring the price movement sideways, traders use only 30% of the trading potential of currency pairs. To help beginner forex traders work more efficiently in the market, today we will consider one interesting vehicle for trading in a sideways called Rubber Band.
Trading System Features
Currency pairs: any
Timeframe: Н4 + H1 + М15
Trading time: around the clock
Recommended brokers: Alpari, RoboForex, TickMill
The success of flat trading depends on the accuracy of entering the transaction and the timely closing of the position. It is optimal to enter the market at the rebound from the border of the side corridor, and exit the transaction is approximately in the middle of the price fluctuation range. There is always a chance that the flat will go into a trend movement, so it is very important to manage to take profits, even if not the maximum possible.
The most difficult thing is to simultaneously determine the presence of the flat itself and the point of bounce from the border (without going at the same time by a false signal at the time of breakdown). To do this, in professional vehicles, technical analysis indicators and various candlestick and graphical figures are used.
The strategy that we will consider today is based on the readings of several indicators at once:
- moving averages;
- Bollinger Bands;
In addition, round price levels (1.2500, 1.2550, 1.2600, etc.), as well as candlestick reversal patterns (pin-bars, absorption patterns, etc.) are used as additional signaling devices.
Together, these tools are designed not only to determine the moment of rebound from the sidewall border, but also make it possible to find the “flat stretch” points - when the price goes beyond it, and then returns and crosses the entire corridor in the opposite direction. This allows you to enter the market even outside the sidewall, and additional signals confirm the signal quality and filter out false ones.
How to determine the flat in the market
For this strategy, there are two main ways to determine flat:
- Building a horizontal channel. This method assumes that the trader is experienced enough to "side by side" determine the lateral trend. To do this, you need to identify two or more price highs located on the same horizontal line, and at least two price lows that also have the same price. The horizontal line tool can help with this trader - you just need to put it on the chart and move it manually until the extrema are “caught”.
- Using moving averages. This method is simpler, since you just need to follow the signals of the indicators. A message that the market is in a flat will be the interweaving of sliding with each other, or their parallel movement. Periods for two MAs are recommended to be assigned 20 and 50.
It is best to use both methods at the same time - if a clear horizontal channel is visually traced on the chart, and moving averages are intertwined, this will be a strong signal. Flat is determined on the H4 timeframe.
Before starting trading, you should also make sure that important economic news is not planned in the near future - the latter can provoke the development of a trend in the market and we will no longer have conditions for a deal.
For work on the strategy, the MT4 trading terminal is best suited, since there you can easily open several chart windows at once (which is required for this strategy). The following set of tools is installed in each of the windows:
- Window H4. We install two moving averages here. Periods - 20 and 50. For convenience, choose different colors for MA;
- Window H1. In the middle window, set the Bollinger Bands with standard settings and the RSI indicator. For the oscillator, the period is left by default, and the overbought and oversold levels are changed to 35 and 65;
- In the third window of M15, you can set the indicator of round levels, or simply define them yourself, visually.
For convenience, each of the windows, after setting all the indicators, can be saved as a separate template - this will allow you to apply the necessary indicators to the chart with a couple of mouse clicks.
You will also find templates and an indicator of round levels in the archive at the end of this article.
Trade entry rules, stop loss and take profit
To open a long position, the following conditions must be met:
- On the H4 timeframe, a flat segment is recorded. The graph fluctuates in the horizontal range, moving averages are intertwined, or move horizontally, and the distance between them is minimal;
- On the H1 timeframe, the price broke through the lower Bollinger line, and the RSI entered the oversold zone (below level 35);
- On M15, a trend reversal signal is needed. It can be a candlestick pattern, like a pin bar, or even a graphical figure, like a double bottom. In addition, the price should rebound from the round level up. Only if all of the above conditions are met, a deal is opened.
Short positions open in a mirror situation:
- On H4 flat;
- At Н1, the price broke through the border of the Bollinger indicator from the bottom up, and the RSI rose above 65;
- A reversal pattern has formed on the M15, and the price bounces down from the round level.
Stop loss is set a few points lower (for purchases) or higher (for sales) of the extreme of the signal candle, or neighboring, if its maximum / minimum is higher / lower. Take profit is set at the midline of the Bollinger Bands - approximately in the middle of the channel. And then it does not shift as the Bollinger lines move.
Additional Rubber Band Trading Tips
- When searching for signals to enter a deal, it is necessary to track previous price extremes. If the signal candle breaks the previous minimum or maximum, the beginning of the trend is possible and it is better to refrain from opening a position.
- Before entering the trade, it is better to wait until the price breaks the round level, and then turns in the opposite direction. Signals to bounce off the level without breaking through it are also acceptable, but not so reliable, because a key mark retest is possible.
- Experienced traders can also search for entry signals on the M5 timeframe. This will give a chance to enter the deal earlier, and save a couple of points. The creator of the system gives such a recommendation, therefore, although trading on M5 is not a clear rule of the TS, this approach can also be used.
Rubber Band Trading Examples
In practice, it is quite difficult to simultaneously identify signals on three screens at once, and if it were not for the multi-currency system, it would be possible to open transactions on it no more than 1-2 times a month. The ability to change trading assets increases the number of signals at times.
A situation suitable for opening a deal was formed on February 27 on the USDJPY chart:
- From about February 21-22, the market was in a flat - on Н4 this is evidenced by crossed but not diverging in different directions movings, as well as the ability to limit the price corridor to two horizontal lines;
- On February 27, at 5:00 p.m. on Н1, a powerful bullish candle broke through the upper Bollinger border, and the RSI climbed to the overbought zone, above level 65;
- At 17:45, the round level 107.50 was broken on M15. After that, the price rolled back, forming a candle with a long shadow up. A Sell Stop order was placed below the minimum of this candle;
- At 18:00 a deal for sale was opened. Stop loss is set above the maximum of the signal candle with a long shadow, take profit - at the level of the middle Bollinger line;
- On February 28, at 7:00, the deal closed at take profit.
Another example is a Swiss franc transaction on March 2:
- A flat is formed on H4 - the moving ones gradually approach, and the price fluctuates within the horizontal corridor;
- At Н1, the price breaks the lower Bollinger line, while the RSI is in the oversold zone;
- On M15, the price breaks the round level of 0.9350. After this, the “internal bar” reversal pattern is formed, which creates all the necessary conditions for opening a purchase transaction;
- The deal opens with a stop loss set at several points below the previous bearish candle. Take profit is set on the middle line of the Bollinger indicator;
- The deal closed at take profit on March 3 at 14:00.
Rubber Band is an interesting strategy that combines, on the one hand, the simplicity of the tools used, and on the other, several levels of filtering and signal confirmation. As a result, we get a vehicle in which even a novice can figure it out, while the strategy itself gives sufficiently reliable signals.
The strategy is intended for flat trading, therefore, when the market is in motion, it is useless. However, it can be effectively combined with a trending TS, thus remaining in the game in any market condition.