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BBands Stop and Stochastic – Bringing Back Binary Memories!

BBands Stop and Stochastic Binary Options Strategy

In the beginning of my trading “adventure”, one of my favorite websites was forex-strategies-revealed.com and I still check it sometimes to see if they made some new additions or to review some of the existing strategies. That’s where today’s strategy comes from and it’s a pretty simple one, based on two Meta Trader 4 indicators: BBands Stop and Stochastic. Is it profitable, is it worth trying? I guess the success of a strategy depends on the trader who uses it so I’ll try to explain it as clear as I can and let you decide afterwards.

 

 

How to use the BBands and Stochastic Strategy?

As mentioned earlier, the strategy uses two indicators: the first is BBands Stop which is a pretty well known custom indicator derived from the classic Bollinger Bands but in this strategy it will be used primarily as a trend identifier. If dots are printed below price, it means an uptrend is in place and if dots are printed above price, a downtrend is established. We will only take trades in the direction of the trend so Calls in an uptrend (dots are below price) and Puts in a downtrend (dots are above price). Here is the picture showing both an uptrend and a downtrend:

 

BB Stops

 

If all the stuff about dots being above or below price seems too complicated, let’s make it easier: Green means uptrend and Red means downtrend (of course, you can choose different colors). Ok, once we have identified a trend according to the strategy, we will move on to the second indicator which is the Stochastic with settings 5, 3, 3. The main purpose of the Stochastic is to identify overbought and oversold conditions of the market so it will hopefully give us the perfect timing for our entry: Calls will only be taken in an uptrend when the Stochastic crosses upwards coming from oversold territory and Puts will only be taken in a downtrend when the Stochastic crosses downwards coming from overbought territory. Here is the same picture as above but with the Stochastic added to the chart:

 

call and Put

 

As you can notice, we place Calls when price is oversold in an uptrend and Puts when price is overbought in a downtrend which is one of the most basic forms of trend following. Here’s a quick summary of the entry rules:

 

 

Call Entry:

  1. BBands Stop is below price
  2. Stochastic (5, 3, 3) crosses upwards coming out of oversold territory

 

Put Entry:

  1. BBands Stop is above price
  2. Stochastic (5, 3, 3) crosses downwards coming out of overbought territory

 

Chart time frame and Expiry time: This is a Forex strategy so a little tweaking is needed to adapt it to Binary Options. I noticed that usually if a 15 minute chart is used, a 2 hour expiry works very well, but sometimes even one hour is enough. However, this has to be tested and adapted to the market conditions.

 

 

 

Why does the “BBands Stop & Stochastic Strategy” Suck?

Almost all trend following strategies have their Kryptonite: the ranging market. Unfortunately it’s very hard to avoid false signals in a ranging market and even the original author of the strategy suggests that extra trend confirmation is needed to make sure you don’t get caught in bad trades. The “Suck” factor definitely comes from the fact that most of the profits made in a trending market will be lost when the ranging period starts if it is not identified in a timely manner.

 

 

 

Why the “BBands Stop & Stochastic Strategy” doesn’t Suck?

Once a trend is identified, the best time to join it is after a retracement and this is exactly what this strategy shows us: a pullback in a trend. Of course a retracement can turn into a full scale reversal or the trend may resume too late, causing our option to expire out of the money, but because we are waiting for an overbought/oversold condition of the Stochastic, the chances of trend resumption are higher.

 

 

 

Wrapping it up – Test, Tweak and Trade

In its current form the strategy is too… let’s say “fragile”. Although the principle is very good, I don’t think the BBands Stop is the best indicator for trend recognition so the strategy needs more testing and tweaking before it can be traded. I mean, it can be traded right away, but successful trading is what we are looking for and I believe the strategy needs some extra confirmation.

 

 

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