It is pretty easy to lose one’s way in the sea of overcomplicated strategies or indicators which supposedly promise rises in profit overnight. Most traders try to find strategies that make profits nicely in both trending and volatile markets, but most of these strategies fit only a set of very specific conditions, and so one of the biggest headaches for a trader is finding a reliable strategy that can be repeated well in different markets and timeframes without making frequent adjustments.
There are many strategies that can be used, but one that simply stands the test of time is the Failed Bounce Trading Strategy. Published first on our website eight years ago, its few simple rules prove lucrative when implemented to capture profitable shorts in the immediate pullback. It works quite well on any ETF-based stocks while pulling off a solid return without constant market watching. It’s buying on failed bounces and selling at points of strength. What is “a failed bounce” though? Let’s describe the main trading rules and see how the strategy works.
Describe the Failed Bounce Trading Strategy, key rules, show test results, and demonstrate its performance in a variety of markets. Here at the end of this article, you will know how to apply it for profit, on which assets it works best, and how one can forecast potential profit of it. Let’s find out the details of the strategy and see how it helps improve your trading result.
Failed Bounce Trading Strategy
Failed Bounce Trading Strategy recognizes when the market fails at its attempts at reversing a short-term trend. A failed bounce refers to the market trying to bounce or recover from an intraday or short-term lower low but cannot hold onto a rally, resuming its original direction. This strategy is used by entering trades when the market demonstrates weakness after a short-term pullback and exiting when strength resumes.
This strategy grounds itself on identifying certain formations that will determine a failed bounce, wherein traders will make as much profit as possible at the rollover and the continuation of the existing trend of the market.
Rules to Trade the Failed Bounce Strategy
To trade the Failed Bounce Strategy there are a few very important rules you must be aware of:
- Yesterday’s IBS (Internal Bar Strength) Must Be At Least 0.6 or Higher:The IBS measures the strength of price action on a given day, based upon how much the open, close, high, and low all relate to one another. Reading .6 or above indicates strong momentum, which you want for a failed bounce setup.
- Yesterday’s Low is Lower Than the Lowest Low of the Previous Five Days:
It reveals that the market is stressed and aligned for a potential failed bounce. The price has declined further than it did below the most recent support levels. This leaves space open for a potential pullback. - Closes Lower Today Than Yesterday:
It reveals that there is still downtrend price action, hence the market is still on the bearish side of the short-term bounce attempt. - Exit When the Close is Higher Than Yesterday’s High:
This exit rule has it so you will get out when the market is strengthening; thus, the system will be telling you to expect a possible reversal of the price again.
These rules are simple but effective ways of catching the best opportunities during a market pullback. Let’s now look at how this strategy performs in real-world conditions.
Trade Examples of the Failed Bounce Strategy
Now let’s look at some trades and see the strategy in action. Below are three trades-two winners and one loser:
- Trade 1: The market failed its bounce off a new low. The strategy sent a buy signal, and the market went up-good profitable trade.
- Trade 2: A second failed bounce setup showed a quick drop-a good profit was taken.
Trade 3: This is one of the least most probable loss conditions whereby the market fails to regain again to remain below after the bounce is unsuccessful, which therefore led to minimal loss.
The strategy sucks weak short markets and then exits when the price begins demonstrating some strength. Over time, this strategy produces marvelous results at those erratic losses here and there.
Backtest Results: Fine Profits with Extremely Low Time Commitment
There is much that’s highly appealing in the Failed Bounce Trading Strategy-it is possible to earn a regular profit without spending too much attention on time constant market watch. So, let’s consider backtest statistics so as to see how the strategy will operate:
Trades Number: 204
Average profit per trade: 0.86%
Total winners: 77%
Net Profit: In that test period the net profit was 450%.
Annual Return: Here it is possible to gain an annual return of 5.8% with a trading frequency relatively low.
Time Spent in the Market: Since the strategy invested only 8.5% of the time, the strategy spent a huge amount of time sitting and waiting in cash for the appropriate sets up.
That low time commitment translates to a 67% high risk-adjusted return, speaking well about waiting for the right opportunity rather than constantly trading.
Performance on Different Assets
The Failed Bounce Trading Strategy performs very well on ETFs based on stocks but varies its performance when applied to different asset classes. Here’s how it performs on a few popular ETFs:
-Pepsi Cola (PEP): Strategy has been impressive and recorded gains during pullbacks in Pepsi’s stock since 1976.
-XLP Consumer Staples ETF: This ETF tracking stocks in the consumer staples sector also just happened to prove pretty reliable by means of the Failed Bounce strategy.
- QQQ (Nasdaq 100 ETF): The best performance came at QQQ, essentially an ETF tracking the largest technology and non-financial companies of the Nasdaq 100. The average profit per trade at QQQ was 1%, which makes QQQ one of the best-performing.
However, it has been less successful using commodities and bonds. Presumably, that is because these securities are much more disparate from common stocks when pullbacks are concerned, which are less pronounced and often more erratic in their trend, thus difficult to perfect in a failed bounce scenario.
Why Does the Failed Bounce Strategy Work
A failed bounce trading strategy works because it plays on perhaps the most typical market behavior: mean reversion. Right after a failed bounce, the market often tends to continue along its trend. It is therefore relatively easy to time entries at those points of weakness (failed bounces) and exits when the market again appears strong by exiting the trade.
Also, the IBS indicator means filtering noise entry with strong momentum favoring days. Only the best setups are taken. The interaction of the price action pattern and technical indicators can offer a sometimes effective yet not too complicated approach.
Conclusion: A simple strategy for predictable returns
Failed Bounce Trading Strategy It is a very simple yet very potent trading tool for traders to profit off of short-term markets’ moves across all different stocks and ETFs, particularly the large-cap stocks and consumer-oriented sectors. As with the previous system, it has a very impressive win rate of 77% and risk-adjusted return of 67% meaning it can allow the trader to be operational without having to sit in front of a computer all day long.
As a matter of fact, it would work best on the stock-based ETF but is likely to fail on the commodities or bonds. Keeping this in mind, and following the simplistic rules of the strategy as it pertains to IBS, price action, and RSI, you can move forward adding the Failed Bounce into your trading activities.
And if you are interesting in get more info on this strategy, as well as other strategies that we present on our website, we have a complete list of strategies that we have on our website with hundreds of tested approaches for every kind of trader.
This very simple and effective strategy can be a solution for catching profits from failed bounces and getting stable returns without checking a market constantly.