Bollinger Bands Strategy

Bollinger Bands Mean Reversion Strategy

1. Strategy Concept

This is a mean reversion strategy that assumes stock prices will return to their historical average after extreme moves. We use Bollinger Bands to identify when an asset is overbought or oversold:
• If the price drops below the lower Bollinger Band, it’s considered oversold, and we buy (expecting a rebound).
• If the price rises above the upper Bollinger Band, it’s considered overbought, and we sell (expecting a pullback).

2. Indicators Used
• 20-day Moving Average (MA20): Represents the mean price over 20 days.
• Upper Band: MA20 + 2 standard deviations (defines overbought conditions).
• Lower Band: MA20 - 2 standard deviations (defines oversold conditions).

3. Trading Rules
• Buy when the price drops below the lower Bollinger Band (oversold).
• Sell when the price rises above the upper Bollinger Band (overbought).
• Exit the position when the price returns to the moving average (mean reversion).

4. Example Scenario
1. The stock price falls sharply below the lower Bollinger Band → Buy signal.
2. The price gradually moves back toward the 20-day moving average → Exit (take profit).
3. If the price breaks above the upper Bollinger Band → Sell signal.
4. The price moves back down to the mean → Exit short position.

5. Strengths of This Strategy

✅ Systematic approach (eliminates emotions).
✅ Works well in sideways (range-bound) markets where prices oscillate around a mean.
✅ Simple and easy to implement with minimal parameters.

6. Weaknesses & Risks

⚠️ Doesn’t work well in strong trends (if the price keeps falling, a buy might be too early).
⚠️ False signals can occur in volatile markets.
⚠️ Needs proper risk management (stop-loss placement is crucial).

Would you like to backtest this strategy to see how profitable it is over time?