Quantifying: Nifty and Bollinger Bands Strategy

Quantifying: Nifty and Bollinger Bands

Bollinger bands are one of the most popular indicators for the traders.

The bands serve as volatility indicator and can be used for breakouts and in option trading for predicting volatility expansion and contraction.

I assume everyone here would know the theory part so let me skip it.

One of the use of Bollinger bands is to long on close above the upper bands and short on close below the lower band. That’s the easiest trade suggested by John Bollinger also who is the founder of the bands.

Let’s see how that strategy worked for the Nifty.

Seeing the chart above the best way to trade was to short on close above the bands. Totally reverse of above strategy. That’s quite mind boggling.

Now I will try to quantify why such a thing has happened and when the simple strategy works and when not.

Since I am not well with excel can some one please help me with some of the number crunching, backtesting and building a macro so that it can be used for other indices/stocks also.

Anyway the initial test suggests the following observations:

1.       Buying on close above the upper band has a real good success rate in Bull phase but the bullish candles at the lower band has even much higher success rate.But with some additional filter it improves a lot.

2.       Two successive closes is the best indicator to buy. But there is a big catch here.

3.       If the strategy fails twice then it is a bearish indicator suggesting change in trend. Best example is the recent fall. But I feel that there was a warning signal even in December suggesting a fall.

The above points I feel is just only a few. If anyone knows excel coding well we can probe further and then unravel the mystery to make the above strategy one of good strategy to trade with.

Part 2: Qunatifying Nifty Bollinger Bands Breakout

Qunatifying Nifty Bollinger Bands : First down side breakout