BBDivergenceStrat

Description

The BBDivergence 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 upon temporary divergences in otherwise highly correlated markets. The divergence is measured by the BBDivergence study, a Bollinger Bands® based technical indicator.

Being a trading system, the BBDivergence strategy uses a combination of well-known indicators and produces simulated orders of all four types: Buy to open, Sell to close, Sell Short, and Buy to cover.

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

• The 3-day maximum divergence is above 20, 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 simulated order 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 simulated order 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 order 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.

Input Parameters

Further Reading

1. "Trading The Loonie" by Markos Katsanos. Technical Analysis of Stocks & Commodities, December 2015.

Bollinger Bands® is a registered trademark of John Bollinger.