Having a good system is only half the battle. Knowing when and how to use it is the second and arguably more important part. Some strategies work better during ranges while others excel in trending markets. In my previous article I shared 3 very simple systems to trade range-bound markets. You can read more about them HERE .

As most seasoned forex traders know, the currency market usually enters into a lull during the summer. This period is also called the summer dull-drums.

All 3 of these systems performed great in the EUR/USD this summer. In this article I will provide an update. Let's see how the 3 systems performed from July 1st to August 20th.

Three Wins for the Bollinger Bands System

The Bollinger Bands system already scored three sizeable wins! Here are the ground rules for the system:

1. We go long when prices hit the lower Bollinger Band
2. We exit when the price touches the middle between the BBands, the 20 SMA
3. Alternatively, we place our stoploss below the most recent swing low

For shorts:

1. We go short when the price hits the upper Bollinger Band
2. We exit at a touch of the 20 simple moving average in the middle
3. Alternatively, we define our risk by placing a stoploss above the recent swing high.

The first signal triggered on July 5th at 1.0976. The Euro opened gap down by 200 pips on results from the Greek referendum . Later that week we exited at 1.1137 for a total gain of 160 pips (1 pip spread deducted).

The second signal was on July 15th at 1.0839. Just seven days later we exited this trade at 1.1010 for a gain of 170 pips.

The third and final signal was on August 11th. The Euro hit the upper Bollinger Band at 1.1125. We took a bit more heat on this one, prices rallied all the way to 1.1211 before falling back and hitting our target at the middle BBand. Total gain of +107 pips.
The chart above shows the three signals with green arrows, while the takeprofit is market with a large X.

Note that none of these trades employed rule number 3 to place the stoploss below the recent swing low. This is an alternative choice to be made by traders and since the results in my original article didn't include SL, neither will these results. If you want to limit your risk, try a 100 or 200 pips stoploss. In the three cases above, even a 100 pips stop would've kept you in the trade.

One Trade in Profit for Stochastic System

According to the Stochastic System, we only had one trade so far. Here are rules we outlined in our article:

1. We wait for oversold condition (Stochastic below 20)
2. The main line (blue in our charts) has to cross above the green signal line
3. We exit when the main line crosses back below the signal line
4. Optional, place stoploss below the recent swing low

For shorts, the rules are reversed:
1. We wait for overbought condition (Stochastic above 80)
2. The main blue line has to cross below the green signal line
3. We exit when the main line crosses back above the signal line
4. Optional, place stoploss above the recent swing high

The signal triggered on July 20th at 1.0934, once the blue line crossed above the green signal line. This trade was ''entered'' at the close of the day, to make the results comparable with my backtest. The max adverse excursion against this trade was 65 pips. This means that a static 100 pips stoploss would’ve again kept us in. The trade was closed on July 28th at 1.0981, for a total gain of 46 pips (after deducting a 1 pip spread).

Combo ''Super'' System

According to the Combo Super System, we would've had 3 trades and all were winners. Our Stochastic long would've been ignored because we were already long by the rules of the BBands system. As noted above, that long got closed for + 170 pips. So for now, the Combo system is performing identically to the Bollinger Bands system. However, our limited backtest however shows some advantage from system diversification. For more on the Combo results for 2013, check out the original article .

Conclusion and Caveats

The two systems outlined above and their combo ‘’super’’ system are not only average but they are available in every charting package. They are not based on some super secret setting or a new indicator. The Bollinger Bands system uses the default settings as in every charting package. While the settings on the Stochastic were tweaked a bit to 14,3,3, they are still a very common combination used by retail traders.

The exits are also very simple. For the BBands we exit at the middle 20 SMA. For the Stochastic we look for a crossover. As we noted above, a very simple 100 pips stoploss for the Euro would’ve done the trick. Alternatively, try a stoploss above/below the most recent swing high/low.

Very simple systems with very simple rules based on an indicator that’s available in every charting package scored 4 major wins this summer, for a total of + 483 pips. With a max risk per trade of 100 pips, this would translate into 4.83 Rs. If those 100 pips represent 1% per trade, the total return would’ve been 4.83%. Not bad for a daily system that takes few minutes to execute.
Now for the caveats. Using range systems like these in trending markets will kill your account. I would certainly not advocate using these systems all year round. But if you can identify when to employ these tools and when not to, you will be ahead of 90% of traders. This is not an easy task, especially for newer traders.

Coming Volatility May Benefit Trend Followers

On the opposite side we have trending systems. These tend to do well in trending markets while performing poorly in range-bound environments, like summer. Historically I’ve observed that September is a good month for trending systems in the forex market. With stock indexes crashing across the world and the VIX at multi-month highs, fear is back in the markets. Today China is down 4 percent while US and EU indexes and lower 2 percent. Oil is testing multi-year lows near $40 dollars per barrel.

While this is bad news for the world economy, it’s good news for trend followers. I plan to post a new set of simple systems to trade the upcoming trends in September. In the meantime, go back in time and see how the different pairs performed during different months of the year. I think you'll be surprised at what you'll find!
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