While sailing through the period when we are just starting as a trader, our mind has to process a plethora of information. Gathering and processing so much information is a very time-consuming process. While doing so, people don’t only spend time but generally also need to spend some money as well. This happens when they are practically evaluating the information that they have consumed through books and the internet. We can use Streak to backtest whatever we learn before taking the strategy live in the market, without the hassle of gathering data or writing complex codes. In this article, we shall be learning and creating a strategy using Bollinger Bands specifically on Tesla Stock.

Bollinger Bands Overview

Bollinger Bands is an indicator overlayed over the price which forms a channel.

Image 1: Bollinger Bands formula

The Bollinger Band Formula and calculation has been briefly explained below :

  • Middle Band: The middle band is 20 period moving average of the price.
  • Upper Band: 2 Standard deviation price move over the last 20 periods is added to Middle Bollinger Band to calculate Upper Band.
  • Lower Band: 2 Standard deviation price move over the last 20 periods is added to Middle Bollinger Band to calculate the lower band.

The Strategy

Two different Bollinger bands will be used for this strategy. One with a standard deviation of 1 and the other with a standard deviation of 2. We will also be using RSI to make entries only during bullish periods. RSI being higher than 50 indicates bullishness. With Streak’s intuitive interface, we will be able to create and backtest the strategy within a few minutes.

Two Bollinger Bands Trading System
Image 2: Two Bollinger Bands Applied to Google 5 min chart

The conditions used for the strategy are :

Long: Buy then close is higher than UBB (20, 1) AND close is lower than UBB(20,2) AND RSI is higher than 50

Cover: Sell when a stop-loss of 1% is reached or a Target profit of 2% is reached.

Trading Strategy Conditions
Image 3: The Strategy Entry and Exit conditions

The strategy has been built on the 15-mins time frame and has been backtested for a period of 3 months.

Backtest Results as seen on Streak.world
Image 4: Backtest Results as shown on Streak.world

During the backtest period, Tesla stock posted returns of -1.47% which is equivalent to buy and hold strategy returns. Though the P&L curve is not very smooth but the strategy has been able to generate returns of 19.47% and an alpha of almost 21% with a max drawdown of only 0.58% which is a very attractive returns to max drawdown ratio.

Conclusion

As we have learned, Bollinger bands is a very simple yet effective indicator. As we can see in our backtest results, along with Tesla, the strategy has shown good returns on other stocks as well. It can either be used alone or can be combined with other indicators to create alpha-generating strategies.