A tactic I've used for a few years, I did not invent it but I have added my own twist to it. Accuracy is so-so but gives great risk to reward ratios. Trades the short term move on end of day bars. Counter swing trade for those brave enough to jump in on it. Not easy when you are going long very near the bottom of a swing. Here are the rules to the 90% mechanical version. I only use it on highly liquid ETFs (reduces volatility of individual stocks, which is important as stops are pretty tight). Untested on the Aussie market so use at your own risk if you not trading US.
Not a strategy to be traded by itself as a system, should be a part of your overall strategy.
End of day bars, Bollinger Band default settings(20,2).
1. For longs we are looking for a down swing that trades outside the lower BB. As long as the bar pokes outside the band that satisfies the criteria, the close does not have to be outside the band. This could potentially be the setup bar.
2. Low of setup bar must be the low of the last 10 bars. We are looking for "fresh" short term lows. The previous bar before the setup bar must also be a lower low bar compared to the bar before it. The more consecutive lower lows the better but the minimum is 2.
3. Setup bar must close in the upper half of the bar. Close must be greater than the mid point which is (high + low)/2. We don't care about the open that is for candlestick users to mess around with.
If end of the day a bar satisfies that criteria we can put a buy above the high of the setup bar. We only enter if high is broken by 1c the next day. Stop is 30c below low of setup bar for SPY and 20c for QQQ and most of XL* ETFs, 25c for IWM, and 15c for most of the DB* ETFs.
If stop is theoretically "taken out" first (as we havn't entered the trade) the next day then set up bar becomes invalid, and we begin again looking for a new setup bar. If high of setup bar gets taken out first then we are in the trade. If day after setup bar is an INSIDE bar which neither renders setup invalid or trigger entry then we ignore the bar, and next day the setup is still valid for entry. Gap ups above more than 1c above the high of setup high is still valid trigger, if you are at the computer adjust your position size accordingly a bit before the open, look at pre market for an indication where it will open at.
Here were all the trades on the SPY for 2014.
Targets is dependent on your personality. If you're more of a short term scalper you can go for 2x or 3x your stop. Do not go for 1x that kills the edge in this tactic. Swing traders can target the middle BB (20 MA) or 75% of the way upto upper BB. Trend followers/intermediate traders can employ your own trailing stops. Very aggressive traders can pyramid into a very long swing and come out withh a big gain.
Do not enter at the close of the setup bar, wait for next day break above. Do not enter if it is not a 10 bar fresh low. Do not enter if there is no 2 consecutive lower lows. Do not enter if it does not poke out of BB.
Reverse everything for shorts.
I use options to trade this strategy but stocks (you will need margin as stops are usually pretty tight) are fine. You might get frustrated with it but if you can stick with it until you catch a decent turning point you will see how powerful it can be. I now trade a more evolved version with a less restrictive filter than the Bollinger Band but that is more discretionary. I suggest you use it along with a trend following strategy. Have fun.