Bollinger Bands (Bollinger Bands)
Bollinger Bands place upper and lower bands around a simple moving average using price standard deviation. The common 20-period, two-standard-deviation setting shows relative price position and whether recent volatility is contracting or expanding; it does not predict direction.
Formula
Middle Band = SMA(20) Upper Band = SMA(20) + (2 × StdDev) Lower Band = SMA(20) - (2 × StdDev)
Method: John Bollinger: Bollinger Band rules
Common strategies
- Mean-reversion test: Define a return inside the band and an exit rule before backtesting. A touch of either band alone is not a buy or sell signal.
- Squeeze watch: Narrowing bands show reduced volatility. Wait for a directional break and assess false breaks; the squeeze itself gives no direction.
- Trend continuation: Price can keep moving along an outer band. A close outside the band can signal continuation rather than an immediate reversal.
How CommonQuant uses it
CommonQuant supports Bollinger Bands in generated strategy rules. Its DSL uses BB(20,2).upper, BB(20,2).middle, and BB(20,2).lower for the common 20-period, two-standard-deviation setup. Inspect the generated rule, test costs and exits, and compare the backtest with out-of-sample behavior before relying on an alert.
Frequently asked questions
What is a Bollinger squeeze?
It is a period when the bands narrow because recent price volatility has fallen. It can precede a larger move in either direction, but the squeeze does not say when or which way. A first band break can also reverse.
Does touching the lower Bollinger Band mean buy?
No. A lower-band touch describes price relative to its recent average and volatility, not a standalone buy signal. In a persistent downtrend, price can follow the lower band. Specify confirmation, invalidation, and costs before testing a rule.