Bollinger Bands mean reversion
In a range, a close outside the band followed by a close back inside often returns to the middle band.
Try Bollinger Bands mean reversion on a real day
A real market day with the date hidden. Run the checklist on the chart, then buy, sell or stay out: the real candles answer.
Check every point of the list before you decide. Stay out if the setup is not there.
John Bollinger created his bands in the early 1980s: a 20-period moving average with bands two standard deviations above and below. He warns that a tag of the band is not a signal by itself. In ranges, however, the bands frame a clean mean-reversion trade.
Why it works
About 90% of closes fall inside the bands in normal conditions. A close outside in a sideways market is a stretch that tends to snap back toward the average.
The same close outside the band in a trending market is a sign of strength. The first job is to know which regime you are in.
The rules
Setup
- Range: the 20-period average is flat and price has crossed it several times recently.
- A candle closes outside the lower band, with RSI(14) below 30.
Entry
- Buy when the next candle closes back inside the band.
Stop loss
- Below the low of the candle that closed outside.
Exit and management
- Target the middle band; move to breakeven halfway.
Filters that improve it
- Skip when the bands are expanding strongly (a breakout may be starting).
- Skip on news days.
Worked example
Illustrative EUR/GBP example on 1H: the 20 average is flat at 0.8560. A candle closes at 0.8530, below the lower band, with RSI at 27. The next closes at 0.8538 inside. Buy, stop at 0.8524, target the middle band at 0.8558.
Illustrative numbers, not a recommendation.
Common mistakes
- Fading band tags in a strong trend ("walking the band").
- Holding past the middle band hoping for the opposite band.
How to practise it
In Candlemind enable Bollinger Bands and RSI. First classify the market as range or trend; only trade this setup in ranges.
Pre-trade checklist
- Flat 20 average (range)
- Close outside the band
- RSI beyond 30/70
- Close back inside the band
- Target the middle band
Frequently asked questions
What are the standard Bollinger Band settings?
A 20-period simple moving average with bands at two standard deviations.
Does price always return to the middle band?
No. In trends price can ride the outer band for a long time, which is why a range filter is essential.