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BBS will mainly profit from trading long positions, but will also trade short during a longer term downtrend.
Let’s first have a look at the evolution of the S&P500 index during our test period; August 2004 till beginning of April 2011. A buy and hold strategy of the 500 stocks in the S&P500 would have made only a very small profit in the order of 20%.
Using the same time period and using automatic trading based on BBS with 42 selected stocks (how we select the stocks I will show later on) gives a total profit of 352% with an average of 42 trades per stock.
These were the trading rules:
All 42 stocks made a profit.
Believe me if I say that there is no perfect full automatic trading system. Avoiding some non-profitable trades can therefore make a big difference. This is also greatly due to the compounding trading strategy applied within the BBS system.
You can of course just use the BBS system and make your profit trading all signals. On the other hand, we all know there is really no perfect system and if you are prepared to invest some time in analyzing the trades proposed by BBS, I can give you additional techniques and indicators to avoid some of the losing trades without compromising the BBS system.
That will certainly boost your profit!
Later on I will show examples how to avoid losing trades triggered by BBS. Only a couple of indicators and basic technical analysis, like support and resistance, will be used in this process. You can always find all basic technical analysis techniques fully explained in my book “Capturing Profit with Technical Analysis”.
As long as there are regular and large enough price moves, BBS can be used in different time frames and different kind of instruments.
A successful application is the use of BBS for the EUR.USD currency pair in the forex market. Tests show that BBS is profitable in the 15 minutes and 60 minutes time frame. Please note that indicator settings may have to be set different depending of your broker.
Forex is not a centralized market and price charts will differ from broker to broker, and with a demo or a live account. I performed the tests with a AAAFx demo account using MetaTrader4.
In the next figure you can see the 15 minute EUR.USD currency pair bar chart.
The thick green line is the upper BBS band and the thick red line is the lower BBS band. The average used is 13 periods. The look back reference period is 6 with a 1.8 bands deviation factor. The blue line is a 100 periods long term moving average on the closing price.
I am using the BBS Expert Advisor (EA) for the 15 minutes EUR.USD forex pair for the period 12/24/2010 till 07/22/2011.This is about 7 months of 15-minute bars. The modeling is done on tick level. There are about 14500 bars in test. We use an initial deposit of $1000 and trade at $1 per pip (1 lot in a mini account). The total profit is $3251 with 108 trades or 325% profit in about 7 months' time.
The maximum drawdown was limited to $365. The largest profitable trade was $259, while the largest loss trade was $59. The average profit trade was $118 with the average loss trade at $41. In the following figure you can see the equity evolution.
Since the maximum drawdown here is limited to $365, trading one mini lot size, we could risk trading 3 mini lots instead of one with the $1000 starting capital. The result is a profit of $9814 or almost 1000% profit in 7 months' time.
If you really want to gamble (ouch! I should not use that word in a trading), with the hope you are starting to trade that right moment in time with a profit, you could even try it with a standard lot (10 mini lots) or $10 per pip. The result here? A total profit of $32716. We were lucky, there was already enough money when we touched the drawdown of $3650, so there was no margin call. Do NOT try this, unless you really intend to g a m b l e!