Bollinger Band mean reversion

Bollinger Bands wrap a moving average with bands set a number of standard deviations away, usually two. A mean-reversion rule fades a close outside the band, expecting price to drift back toward the average. The same bands also show when that idea is dangerous: in a strong trend, price can walk along the upper or lower band for a long time.

Not investment advice. Nothing here is a recommendation to buy or sell anything. Backtests and historical studies are not guarantees, and a rule that worked in one sample can fail in the next. Trading can lose money. Links are for education, not endorsements. Do your own research.

Rules

The usual setup is a 20-period simple average and bands at 2 standard deviations. Buy a close below the lower band, or a tag of it with a confirming RSI reading under 30, and exit at the middle band. Sell or stand aside on a close above the upper band only if a separate trend filter says the market is not trending up. John Bollinger's own materials treat a band tag as a relative high or low, not an automatic order.

Where AI fits

A model can separate band walks from genuine fades, which is the decision this strategy hinges on. AI can also test band width and the exit target, middle band versus opposite band, under transaction costs. Generating the indicator code is the easy part. Labeling which touches were tradable is the useful part.

Markets

Range-bound FX pairs, equity indexes in quiet regimes, and individual stocks outside of news.

Timeframes

15-minute to daily. Daily bands on a stock in a news trend will not mean-revert on schedule.

Risks

Fading a band in a trend is how this loses money. Volatility also changes, so a 2-standard-deviation band is not a fixed probability of reversal. Stops that sit just outside the band get run in fast markets.

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