Mean Reversion · Intermediate

Bollinger Band Reversion

Two standard deviations is stretched — fade it back to the mean.

Origin: John Bollinger’s bands (1980s), traded as a return to the mean

Session: Any; best in balanced markets
Timeframes: 1h–1d
Markets: QQQ, SPY, Index futures
Reward: About 1–1.5R to the middle band

IllustrationBands (20, 2σ)Middle band

Hourly sketch. The close at 482.9 sits below the lower band (483.6). Long at the next open with a 1.5× ATR stop at 480.1. Three bars later price closes back above the middle band, and the trade exits at 487.2 — about 1.5R.

Why it works

Bollinger Bands sit two standard deviations either side of a 20-period average. A close below the lower band in an uptrend is statistically stretched. The playbook buys it and exits at the middle band, where the stretch has resolved.

The rules

01Setup

Bands: 20-period SMA ± 2 standard deviations.
Trend filter: price above the 200-period SMA for longs.

02Entry

Long at the next open after a close below the lower band.

03Stop

1.5× ATR below the signal close — bands can keep walking when the trend changes.

04Target

Exit at the next open after a close at or above the middle band.

05Management

Skip entries while the bands expand sharply. That is a breakout, not a stretch.

06Invalidation

A close below the 200-period SMA.

Common mistakes

Fading band walks in strong trends
Using a fixed target far beyond the mean
Ignoring the trend filter

Educational material, not financial advice. The illustration is a sketch of the rules, not a historical trade. Results in the backtester are hypothetical and do not guarantee future performance.