Mean reversion
Bollinger Bands mean reversion
John Bollinger’s bands are a 20-candle average plus and minus two standard deviations. Here they serve as a sign of an oversold market: a price far below the average means a return to it is expected.
Rules
- Lower band: SMA 20 minus 2 standard deviations.
- A close below the lower band: buy.
- A close above the average: sell; the stop is 10% from the entry.
Code for the lab
n = input(20, 10, 50, 5) k = input(2, 1, 3, 0.5) mid = bb_mid(close, n) lower = bb_lower(close, n, k) plot mid, lower buy when close < lower sell when close > mid stop 10%
You can change the code right in the lab: the numbers in input(…) become sliders.
Results on eight markets
| Market | CAGR | Drawdown | Trades | Buy and hold: CAGR | Buy and hold: drawdown |
|---|---|---|---|---|---|
| MOEX Russia Index | — | — | — | — | — |
| Sberbank | — | — | — | — | — |
| Gazprom | — | — | — | — | — |
| Gold, $ per ounce | — | — | — | — | — |
| Brent crude, $ per barrel | — | — | — | — | — |
| Bitcoin | — | — | — | — | — |
| Ether | — | — | — | — | — |
| VN-Index | — | — | — | — | — |
| Market | CAGR | Drawdown | Trades | Buy and hold: CAGR | Buy and hold: drawdown |
|---|---|---|---|---|---|
| MOEX Russia Index | — | — | — | — | — |
| Sberbank | — | — | — | — | — |
| Gazprom | — | — | — | — | — |
| Gold, $ per ounce | — | — | — | — | — |
| Brent crude, $ per barrel | — | — | — | — | — |
| Bitcoin | — | — | — | — | — |
| Ether | — | — | — | — | — |
| VN-Index | — | — | — | — | — |
The numbers are calculated in your browser from fresh source candles.
Default parameters, daily candles, a fee and slippage of 0.05% each per trade, no return on cash out of the market, prices without dividends. The test starts once all of the rule’s indicators are calculated.
What research says
Bollinger himself calls band touches “tags, not signals” and warns that in a trend the price can walk along a band.
Lento, Gradojevic and Wright (2007): after costs, band signals did not beat buy and hold. On trending markets, especially crypto, the return to the average often never comes, and the table shows it.
Original source: John Bollinger. Bollinger Band Rules
When the rule breaks
- A strong downtrend: the price walks along the lower band for weeks.
- A sharp fall through the stop: a large loss after a string of small gains.
- Crypto: in a lab experiment, mean reversion on 30-minute candles lost money in every part of the history.