When the price is making similar swing highs and lows like this, it’s called a sideways or range market. In fact, as we have seen after taking 26000 trades in a previous video, this happens more than 70% of the time. So knowing the highest win rate range market strategy is more important than one might think.
So to find which entry strategy works well, first, I made a list of most commonly recommended range market strategies on the internet. And almost everywhere I looked, these three strategies were always mentioned: MACD, RSI, and Bollinger Bands. To find out which is the best strategy out of these 3, and what are the win rates of these strategies in the sideways market, I took 100 trades with each of them and tracked the performances.
First, I identified the range market by looking at the recent swing highs and swing lows. If the price started to reverse from around the same swing high or low like this, the start of the range market was pretty much confirmed. Furthermore, I considered the price to be still ranging as long as it didn’t give a clear breakout like this.
When the price was near the edges of the range, I looked at MACD, RSI and Bollinger Bands indicators for an entry signal. Obviously, if the price was near the top of the range, I looked for short entry signals, and when the price was near the bottom of the range, I only looked for long entries.
But then I faced 2 main problems.
You see, Bollinger Bands is a difficult strategy. One of the popular ways to take a long entry is to wait for the price to go below the lower Bollinger Band, and then wait for it to cross back inside. But this can make things a little biased. Just look at this example I found on the internet. They haven’t even followed their own entry rules here. To solve this problem, I used the Percent B indicator instead.
This makes things much easier because if the price goes below the lower Bollinger band, the Percent B indicator will also go below its lower band. And when the price starts reversing in the upward direction, the Percent B line will also start moving in the upward direction. So an easily identifiable long entry can be taken when the Bollinger Bands % indicator crosses above its lower band. A short entry is when the Percent B line crosses below its upper band.
The second problem was that while testing these 3 strategies at the same place, a high reward-risk ratio profit target of some of them was going outside the range. So to solve this problem and to make sure the profit target stays inside the range of all strategies at all times, I used a 0.5 to 1 reward-risk ratio. Keep this in mind when you see the win rate next.
With RSI, I took a long trade when the RSI line crossed above its simple moving average. And I took a short trade when the RSI crossed below its simple moving average. To make sure the entry was good and not late, I only took short trades if the short crossover was above the 50 line. And only took the long trade if the long crossover was below the 50 RSI line.
With MACD, I took long trades when the MACD line crossed above its signal line only if the crossover happened below the zero line. I took short trades when the MACD line crossed below the signal line only if the crossover happened above the zero line.
In all of these setups, the stop-loss was set just out of the range.
After taking 300 trades in the sideways markets with these 3 trading strategies, the results showed that MACD gives the entries late out of the three. Bollinger Bands Percent was the fastest one to give the entry. But fast is not always good. Bollinger Bands’ fast entries led to many false signals. When it came to more trading opportunities, RSI took the lead, while Bollinger Bands gave the least amount of entries.
The results showed that Bollinger Bands straight-up lost money in the same market structure. The RSI was good enough and profitable. And yes, as regular viewers of the channel probably guessed, MACD was the best strategy for finding entries in a sideways market. Even though the MACD entries were late compared to others, they were more reliable. MACD had the highest win rate at 78%. RSI had a win rate of 70%, and Bollinger Bands had a win rate of 60%. Remember that the reward-risk ratio was 0.5 to 1. So the breakeven win rate is around 67%. Now you know what to use to find entries in the range market. That’s all!
