This article assumes you are familiar with Alexander Elder’s trading system. In his books, Elder clearly defines his entry levels but his exit criteria are divergences between the indicators and price action, an indication of reversal.
However, we all know how difficult it is to trade divergences because they are always easier to identify on hindsight, thereby making it impossible to define a precise price target as each price bar forms. We experimented with various indicators to see how we can capture profits quickly with minimum uncertainty, and found the Bollinger Bands (BB) to be a good combination with Elder’s strategy.
In the EURUSD chart above, the pink/orange/yellow solid vertical lines are trade entry signals from Elder’s system. As we overlay the Bollinger Bands, you will realize that if price has crossed the centre line of the BB, it will very likely touch the opposite side of the BB as you see from the blue arrows.
So as the pink vertical line suggests a long entry, price went on the touch the upper BB line. In the orange line short entry signal, the converse occurs. Notice how in the yellow vertical line, Elder’s system suggests a long entry but price has already touched the upper BB, and later reversed downwards, keeping a trader out of a fake long signal.
This indicator combination logic assumes that markets are ranging most of the time, which is a fact. However, if your strategy is to catch and ride big trends, exiting with the above method will probably be too early because in strong trends, prices hit the outer BB lines and ride the outer BB lines, widening the Bollinger Bands.
But if you are like most traders who prefer to take money off the table fast, using the above could be one way. Let us know what you think!