Different people will use terms to mean different things. The definition of a bounce trade can vary depending on who is doing the talking. The definition, here, is an intra-day trade based on an overbought or oversold condition, meant to represent an extreme condition, and expecting that it will return to a more normal condition.
The time frames typically used would be looking at an hourly, 30 minute, or 15 minute chart. Sometimes, a 5 minute chart may work, but there would have to be enough volatility to justify it. Determining an overbought or oversold condition would be through the use of some indicators that are suited for that.
The Stochastic indicator, using a 14 %K period and 3 for the other periods, along with an exponential MA method is one such indicator. Above 80 would represent overbought and below 20 would be oversold. The CCI, using a 20 period and having levels of 200 and -200 would be another indicator. Above 200 is considered overbought and below -200 is oversold. The last indicator used is Bollinger Bands using a 20 period and 2 deviations. Extreme conditions would be when moves occur outside the outer bands. Look for complete candles outside the band or most of the candle outside of the band.
The setup is waiting for an extreme (overbought or oversold) condition represented by all indicators showing an extreme. The expectation would then be for a move back to normal, represented by the middle band of the Bollinger Bands which is a 20 moving average.
To further improve the success of the trade, look at the trend of the pair based on a daily chart. Look for intra-day overbought conditions in a daily downward trend or an intra-day oversold condition in a daily upward trend. Another favorable factor is to make sure the bands are spread far apart. If the bands are squeezed together, there is probably not going to be a big enough move to make the bonce trade worthwhile.
Entry would be after a completed candle returns toward the middle band. Exit would be after the middle band is reached. The stop loss for this trade would be based on the completed candle’s peak or bottom that determined the entry. If the trade isn’t working its way back to normal after a few candles, consider exiting the trade.
No comments yet.