Rubber Band Trading Strategy— when the Flat is your friend

Despite the fact that 70% of the time the market is in a flat state, most strategies for trading on Forex are trendy ones. Thus, ignoring the movement of prices in the outset, traders use only 30% of the trading potential of currency pairs. To help novice forex traders to work in the market more effectively, today we will overview one interesting TS for trading in the flat period called Rubber Band.

Trading System Characteristics

Platform: any
Currency pairs: any
Timeframe: Н4 + H1 + М15
Trading time: around the clock

Recommended brokers: Roboforex, Alpari, AMarkets

The concept of the Strategy

The success of trading in a flat depends on the accuracy of entering the deal and the timely closure of the position. It is best to enter the market when bouncing off the border of the lateral corridor, and closing the transaction - approximately in the middle of the price fluctuation range.

There is always the likelihood that the flat will turn into a trend movement, so it is very important to have time to fix the profit, albeit not as high as possible.

Determining the presence of the flat itself and the point of rebound from the border at the same time is the most difficult part (without going through a false signal at the time of breakdown). For this purpose, technical indicators and technical candlesticks and graphic figures are used in professional technical bodies.

The strategy that we will consider today is based on the testimony of several indicators at once:

• Moving averages;
• Bollinger bands;
• RSI.

In addition, round price levels (1.2500, 1.2550, 1.2600, etc.) are used as additional alarms, as well as candlestick patterns (pin bars, etc.).

In combination, these tools are designed not just to determine the moment of the rebound from the flat’s border, but also give the chance to even find the points of “stretching the flat” - 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 corridor, and additional signals confirm the quality of the signal and filter out false signals.

How to determine flat in the market

For this strategy, there are two main ways to determine the flat:

1. Construction of a horizontal channel. This method assumes that the trader is experienced enough to “spot” the sideways trend. To do this, you need to identify two or more price peaks located on one horizontal line, and at least two price minima that also have the same price. The “horizontal line” tool can help the trader with it. You just need to put it on the chart and move it manually until the extremes are “caught”.
2. Use of moving averages. This method is simpler since it is simple enough to follow the signals of the indicators. The message that the market is in the flat, will become an interlacing of MAs with each other, or their parallel movement. Recommended periods for two MAs are 20 and 50.

It is best to use both methods at the same time - if the chart will visually trace an explicit horizontal channel, and the moving averages will be intertwined, this will be a strong signal. A flat is determined on the H4 timeframe.

Before you start trading, you should also make sure that in the near future, there will be no release of important economic news. They can provoke the development of the trend in the market and we will no longer have conditions for the transaction.

Setting the indicators

To work on a strategy, the MT4 trading terminal is suited best, since it is easy to open several chart windows at once (which is required for this strategy). In each of the windows, the following set of tools is installed:

1. H4 Window. Here we set two moving averages. The periods are 20 and 50. For convenience, we choose different colors for MAs;
2. H1 Window. In the middle window, set the Bollinger Bands with standard settings and the RSI indicator. Leave the default period for the oscillator, and change the overbought and oversold levels to 35 and 65;
3. In the third M15 window, you can set the indicator of round levels, or simply define them yourself, visually.

For convenience, after setting all the indicators, each of the windows can be saved as a separate template - this will, if necessary, put the necessary indicators on the chart with a couple of clicks.

Also, you will find templates and an indicator of round levels in the archive at the end of this article.

Rules of entering the deal, stop loss and take profit

To open a long position, the following conditions must be met:

1. A period of the flat is fixed on the H4 timeframe. The chart fluctuates in the horizontal range, the moving averages are intertwined, or move horizontally, and the distance between them is minimal;
2. The price broke through the lower Bollinger band, and RSI entered the oversold zone (below 35 level) on the H1 timeframe;
3. At M15, you should wait for a trend reversal signal. It can be a candle pattern, like a pin bar, or even a graphic figure, like a double bottom. In addition, there should be a price rebound from the round-up level. Only if all of the above conditions are met, you should open the transaction.

Short positions should be opened in the opposite situation:

1. At H4 flat;
2. At H1, the price broke through the Bollinger bands indicator from the bottom up, and RSI rose above 65;
3. You see a reversal pattern on M15, and the price makes a rebound from the round level down.

Set the stop loss several points lower (for buying) or higher (for selling) than the extremum of the signal candle, or the neighboring one, if its maximum/minimum is higher/lower. Set the take profit at the level of the midline of the Bollinger Bands - approximately in the middle of the channel. Then, don’t move it as the Bollinger Bands move.

Additional recommendations for Rubber Band trading

• When searching for signals to enter the transaction, you must monitor the previous price extremes. If the signal candle breaks the previous minimum or maximum, it may be the beginning of the trend. So, it is better to refrain from opening the position.
• Before entering the trade, it is better to wait for the price to break through the round level and then reverse in the opposite direction. Signals for a rebound from the level without its penetration are also acceptable, but not so reliable because it is possible to retest the key mark.
• Experienced traders can also search for signals to enter on the M5 timeframe. This will give a chance to enter the deal earlier and save a couple of points. The system developer gives such a recommendation. Therefore, although trade on the M5 is not a clear rule of the TS, this approach can also be used.

Examples of trading using the Rubber Band

In practice, it is quite difficult to identify signals at once on three screens simultaneously, and if the system didn’t support several currencies, it would be possible to open transactions on it no more than 1-2 times a month. The ability to change trading assets multiplies the number of signals that you can get.

A suitable situation for the opening of the deal was on February 27 on the USDJPY chart:

1. Approximately from February 21-22 the market was in the flat - on H4 this is evidenced by intersected but not diverged later MAs, as well as the possibility to limit the price corridor by two horizontal lines;
2. On February 27 at 17:00, a powerful bullish candle broke the upper Bollinger Band, and RSI climbed to the overbought zone, above the level of 65 on H1;
3. The round level of 107.50 was broken at 17:45 on the M15. After that, the price rolled back, forming a candle with a long shadow up. Below the minimum of this candle, a Sell Stop order was placed;
4. At 6 pm, a sale position was opened. Stop loss was set above the maximum of the signal candle with a long shadow, the take profit was at the level of the middle Bollinger line;
5. On February 28 at 7:00, the deal was closed by take profit.

 

Another example is the deal on the Swiss franc on March 2:

1. At H4, a flat was formed. Moving averages gradually converged, and the price fluctuated within the boundaries of the horizontal corridor;
2. At H1, the price breaks the lower Bollinger line, and RSI is in the oversold zone;
3. At M15, the price breaks through the round level of 0.9350. After that, the reversal pattern “Inside Bar” is formed, which creates all the necessary conditions for opening a deal for purchase;
4. The position was opened with a stop loss placed several points below the previous bear candle. Take profit is placed on the middle line of the Bollinger indicator;
5. The deal closed on take profit on March 3 at 14:00.

Conclusion

Rubber Band is an interesting strategy combining, on the one hand, the simplicity of the instruments used, and on the other, several levels of filtering and confirmation of signals. In the end, we get a TS, understandable even for a beginner, and the strategy itself gives sufficiently reliable signals.

The strategy is for trading in flat, so when the market is in motion - it is useless. However, it can be effectively combined with the trend TS, thus remaining in the game under any market condition.

Download Files of Rubber Band Strategy

Take care, Michael

ForexTraderPortal.com