Bollinger Bands Divergence Strategy

By Samantha Baltodano

TL;DR:

The Bollinger Bands Divergence strategy is a trading system that uses a combination of well-known indicators and produces trade signals of all four types: Buy to open, Sell to close, Sell Short, and Buy to cover. The divergence is measured by the Bollinger Bands Divergence study, a Bollinger Bands based technical indicator. It uses specific conditions to determine when to buy or sell depending on the correlation between the primary and secondary close prices.

What Is BB Divergence Strategy?

The Bollinger Bands Divergence strategy is a trading system developed by Markos Katsanos and described in his article “Trading the Loonie”. The main idea behind this system is to act on temporary divergences in otherwise highly correlated markets. The divergence is measured by the Bollinger Bands Divergence study, a Bollinger Bands based technical indicator.

Being a trading system, the Bollinger Bands Divergence strategy uses a combination of well-known indicators and produces trade signals of all four types: Buy to open, Sell to close, Sell Short, and Buy to cover.

A Buy to open signal is added if all of the following conditions are true:

• The 3-day maximum divergence is above 20-day, but is currently falling;
• Both primary close price and secondary close average have been trending up during last 2 days;
• The correlation between the primary and the secondary close prices is above -0.4.

A Sell to close signal is added if any of the following is true:

• The MACD crosses below its own 9-day EMA and the Stochastic is above 85;
• The 3-day minimum divergence is below -20 and the rate of change is below -3;
• The primary trade closes at the lowest level for the last 15 days, while the correlation is below -0.4.

A Sell short signal is added if all of the following conditions are true:

• The 3-day minimum divergence is below -20, but is currently rising;
• Both primary close price and secondary close average have been in downtrend during last 2 days;
• The correlation between the primary and the secondary close prices is above 0.4.

A Buy to cover signal is added if any of the following is true:

• The MACD crosses below its own 9-day EMA, the Stochastic is below 85, and the secondary close is by at least 4% greater than the 15-day low;
• The 3-day maximum divergence is above 20 and the rate of change is above 4.5;
• The primary trade closes at the highest level for the last 15 days, while the correlation is below -0.4.

Summary

• Bollinger Bands Divergence strategy is a trading system that uses a combination of well-known indicators
• The divergence is measured by the Bollinger Bands Divergence study
• Produces trade signals of all four types: Buy to open, Sell to close, Sell Short, and Buy to cover
• Uses specific conditions to determine when to buy or sell depending on the correlation between the primary and secondary close prices.

Bollinger Bands Divergence is just one of many strategies that Archaide automates. For a full list of strategies and studies available click here.

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