Lesson 5
Bollinger Mean Reversion
Counter Trend Trading System
By Adam Khoo
Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
Swing Trading System:
Bollinger Mean Reversion
Bollinger Mean Reversion
The Bollinger Mean Reversion (BMR) is a swing trading strategy that seeks to
buy stocks that are oversold on a short term basis and short stocks that are
overbought on a short term basis. This is a counter trend, mean reversion
strategy.
Overbought
Short
Long
Oversold
BMR Long Setup
Long
Oversold
BMR Long Setup: Bullish Pin Bar
Bullish Pin Bar
A specific candlestick pattern where the body of the candle is small.
There is little or no upper shadow. The lower shadow is relatively long
and at least 2/3rd of the range of the candle
Lower shadow 2/3
Range
BMR Long Setup: Bullish Divergence Reversal
Price makes lower low
Bullish pin Bar
1 of the Indicators makes higher low
BMR Long Setup: Chart Setup
Bollinger Bands (20, 2)
50MA
20EMA
MACD (12,26,9)
Full Stohcastics
(5,3,3)
RSI
(10)
BMR Long Setup
Entry Rules for Long BMR
• SPY is above 20EMA (index is short term bullish) and SPY MACD is Bullish (optional)
• Price Declines Rapidly to a New Low (6 months)
• Highest probability is when this coincides with a previous support level (bullish pin must be lower than
previous lows)
• Bullish Pin pierces or appears outside the lower Bollinger Bands (20SMA, 2 standard deviation) and far from the
20EMA (at least 1R Away)
• At least 1 bullish divergence reversal from MACD, Stochastics or RSI indicator.
Placing Orders for Long BMR
• Entry: Buy stop limit order 1-10 cents above Bullish pin
• Stop Loss: Sell stop order 1-10 cents below Bullish pin
• The Distance between Entry and stop loss is 1R. There should be at least a 1R distance to the 20EMA
• Target price: Sell Limit placed 2R above entry price
• The target price should be below the 50MA
Trade Management & Exit Rules for Long BMR
• Shift the stop loss order to the entry price once price moves 1R in your favour and/or hits the 20EMA
• Subsequently, allow the price to hit your stop loss order (0R or -1R) or your Profit target (+2R)
Sell Limit GTC
2R
Buy stop limit
1R
Sell Stop GTC
Long BMR
Sell Limit
Buy Stop Limit
Sell Stop
Bullish pin at
Lowest low
Bullish Divergence
Sell Limit
Buy Stop Limit
Sell Stop
Bullish pin at
Bullish Divergence Lowest low
Long BMR
Sell Limit
Buy Stop Limit
Sell Stop
Bullish pin at
Lowest low
Bullish Divergence
Long BMR
sell limit
buy stop limit
sell stop
Lowest low in last 6 months
Bullish pin pierce BB
Bullish Divergence on MACD
BMR Short Setup
Overbought
Short
BMR Short Setup: Bearish Pin Bar
Bearish Pin Bar
A specific candlestick pattern where the body of the candle is small.
There is little or no lower shadow. The upper shadow is relatively long
and at least 2/3rd of the range of the candle
Upper shadow 2/3
Range
BMR Short Setup: Bearish Divergence Reversal
Bearish pin Bar
Price makes Higher High
1 Indicator makes lower highs
BMR Short Setup
Entry Rules for Short BMR
• SPY is below 20EMA (index is short term bearish) and SPY MACD is bearish (optional)
• Price rises Rapidly to a New high (6 months)
• Highest probability is when this coincides with a previous resistance level (bearish pin must be higher than previous
highs)
• Bearish Pin pierces or appears outside the upper Bollinger Bands (20SMA, 2 standard deviation) and far from the 20EMA
(at least 1R Away)
• At least 1 bearish divergence reversal from MACD, Stochastics or RSI indicator.
Placing Orders for Short BMR
• Entry: Sell stop limit order 1-10 cents below Bearish pin
• Stop Loss: Buy stop order 1-10 cents above Bearish pin
• The Distance between Entry and stop loss is 1R. The Distance between Entry and stop loss is 1R. There should be at least
a 1R distance to the 20EMA
• Target price: Buy Limit order placed 2R below entry price
• The target price should be above the 50MA
Trade Management & Exit Rules for Short BMR
• Shift the stop loss order to the entry price once price moves 1R in your favour and/or hits the 20EMA
• Subsequently, allow the price to hit your stop loss order (0R or -1R) or your Profit target (+2R)
Buy Stop GTC
1R
Sell stop limit
2R
Buy Limit GTC
Short BMR
Highest high in last 6 months
Bearish Pierce BB
Buy stop
Sell stop limit
Buy limit
Divergence on Stochastics
Short BMR
Highest high in last 6 months
Buy stop
Sell stop limit
Buy limit
Bearish Divergence on MACD
Trade Management Based on Price Action
• One approach is a binary approach to trading (-1R, 2R) allowing
the trade to either hit stop loss or profit target
• Another approach is to exit the trade based on price action
• For short trades, shift stop loss to a few cents above first bullish
candle, bullish reversal pattern (i.e. Bullish pin) or when candle
hits a support level (i.e. 20EMA)
• This tends to average winners to 1.6-1.7R but averages loses to
-0.6R.
Trade Management Based on Price Action
SL
SL shifted to SL2 which is just
above first bullish candle Entry
SL 2
High Probability Mean Reversion Trades
• The highest probability mean reversion long trades happen when a
previous low (and stops placed below) are ‘taken out’ by a new
low from the bullish pin
• Entry above the bullish pin must be ABOVE the previous low.
High Probability Mean Reversion Trades
• The highest probability mean reversion long trades happen when a
previous low (and stops placed below) are ‘taken out’ by a new
low from the bullish pin
• Entry above the bullish pin must be ABOVE the previous low.
High Probability Mean Reversion Trades
• The highest probability mean reversion short trades happen when
a previous high (and stops placed above) are ‘taken out’ by a new
high from the bearish pin
• Entry below the bullish pin must be BELOW the previous high
Important Points
• Avoid entering trades if companies are going to announce earnings
in less than 10 days
• Exit trades before a company announces earnings
• Earnings calendar can be found at www.google.com/finance
• Avoid entering trades when stocks have less than 150,000 average
volume a day
• Avoid shorting stocks that….
• Are less than $10
• Are less than $1 billion in Market Cap
• Are in the Biotechnology or Pharmaceutical Industry
Date can be found on www.finviz.com
High Probability Bollinger Mean Reversion Trades
High Probability BMR Trades
1) Take Out Stops through Double Bottom (long) or Double Top (Short)
2) Pin Bar is at a Fibonacci Extension Level
Long BMR: Taking Out Stops (Double Bottom)
Long BMR: Taking Out Stops (Double Bottom)
Short BMR: Taking Out Stops (Double Top)
Lesson 5
Bollinger Mean Reversion
Counter Trend Trading System
By Adam Khoo
Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
