Bollinger Bands are volatility-adjusted price channels that adapt to market conditions. Created by John Bollinger, they provide dynamic overbought and oversold levels that complement RSI in mean reversion strategies.
Construction
Bollinger Bands consist of three lines:
The bands expand during volatile periods and contract during calm periods, automatically adjusting to market conditions.
Mean Reversion Application
For mean reversion, the lower band is particularly important:
- Price at lower band - Potentially oversold, may revert higher
- %B indicator - Measures where price is relative to the bands (0% = at lower band, 100% = at upper band)
- Period: 20 bars
- Standard Deviation: 2.0
- Entry signal: Price below or touching lower band
- Win rate tracking: Historical success rate of band touches
Advantages Over Fixed Thresholds
Unlike fixed price levels, Bollinger Bands adapt to volatility:
- In high-volatility periods, bands widen, requiring larger deviations for signals
- In low-volatility periods, bands narrow, capturing smaller but potentially significant moves
- This self-adjustment helps avoid false signals in changing market conditions
Win Rate Analysis
Similar to RSI, the platform backtests Bollinger Band signals:
- What percentage of lower band touches resulted in profitable bounces?
- What was the average gain when mean reversion occurred?
- How does this vary across different market regimes?
Bollinger Band win rate receives a 15% weight in the daily composite score.
Prices can "walk the bands" during strong trends, staying at the lower band while continuing to decline. This is why Bollinger Bands work best when the security has already been identified as mean-reverting.
Combining with RSI
The strongest mean reversion signals occur when multiple indicators align:
- Price at or below lower Bollinger Band
- RSI below its optimal entry threshold
- Hurst Exponent confirming mean-reverting regime