Profit from Reversals: Gambit Trading Strategy

The Gambit trading strategy is a method designed to capture large profits with minimal risk by carefully timing entries and exits in trending markets. It focuses on entering trades during pullbacks or reversals from key levels, using Bollinger Bands as the sole indicator to determine these moments. 

The strategy was created by Walter T. Downs, a mathematician and chess player. Because of the author’s specialization, clear emphasis is focused on patience, as trades can take a while to develop, but the potential rewards are substantial when executed correctly.

What can you trade with it?

This strategy is not limited to specific financial instruments and can be applied to a variety of assets, such as Forex, commodities, stocks, and indices, as long as they exhibit clear bullish or bearish trends.

Some of the most common pairs, showing clear trend characteristics are GBPUSD, USDJPY, GBPJPY, USDCAD, and CADJPY.

In the example provided further down below (GBPJPY), the strategy effectively identifies trade setups in a currency pair, but its logic is flexible enough for any asset that follows a similar price movement pattern.

On what timeframes?

The Gambit strategy is optimized for higher timeframes, specifically the D1 (daily) and H4 (4-hour) charts. 

While the strategy was initially developed for the D1 timeframe, it was discovered to work effectively on the H4 chart as well. These longer timeframes make the strategy well-suited for traders who prefer a slower pace, as trades typically require holding positions for several days to unwind, allowing for a calmer and more deliberate approach to trading.

How to use it?

The strategy works by identifying trend-following opportunities using Bollinger Bands. Here’s a breakdown of how it works for both buy and sell signals:

Sell signal:

1. Trend identification. The central Bollinger line should be trending downward for at least 10 consecutive bars (D1 or H4).
2. Signal candle setup. The “Signal” candle (candle “S”) must have both its high and low above those of the previous candle (candle “P”). Additionally, the close price of the signal candle should be in the lower part of its range.
3. Entry point. If the above conditions are met, enter a sell trade at the opening price of the third candle (candle “E”).
4. Stop-Loss. The Stop-Loss must be just above the high of the “Signal” candle.
5. Position management. After four bars, adjust your Stop-Loss to the trade’s opening price to secure the position.
6. Exit. Close the trade when the price crosses below the lower Bollinger Band.

Buy signal:

1. Trend identification. The central Bollinger line should be moving upward for at least 10 bars (D1, H4).
2. Signal candle setup. The “Signal” Candle (candle “S”) must have its low and high below the previous candle’s low and high (candle “P”), and its close should be in the upper half of its range, above the central Bollinger line.
3. Entry point. Enter a buy trade at the opening price of the next candle (candle “E”) after the “Signal” one.
4. Stop-Loss. Set the Stop-Loss just below the low of the “Signal” candle.
5. Position management. On the fourth bar, trail the Stop-Loss to the opening price to protect the trade.
6. Exit. Close the trade when the price crosses above the upper Bollinger Band.

This strategy ensures you’re trading in the direction of the broader trend while using Bollinger Bands to pinpoint precise entry and exit points based on market pullbacks. Patience is key, as waiting for all conditions to align helps minimize risks while maximizing potential profits.

Real examples

Example 1: Buy signal

On the GBPJPY daily chart, using this strategy, we get to trade at some point a very profitable opportunity. It appears around May 9: A signal candle, opening and closing in the upper half of the previous one. As the price is plotting its course above the middle Bollinger Band, this is a confirmed ‘buy’ signal. The Stop-Loss (SL) is placed below the low of the “Signal” candle. In just two days the position could have been closed with a lump profit.

Example 2: Sell signal

The second example is for the short side. Around May 9, 2019, a “Signal” candle formed, while the price was steadily trading below the Middle Band. After opening a position the next day, the Take-Profit (TP) would have been reached within two days. Later, in the middle of June, another set-up appeared. The red “Signal” candle closed exactly lower than the middle point of the previous (“P”) bar. Meanwhile, the price was below a downwards-moving Middle Bollinger Band. The Take-Profit (TP) also was reached within a short period of time – only five days.

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