TL;DR: The Bollinger Bands mean reversion method trades controlled extremes: wait for price to touch or slightly close beyond the outer band, confirm a clean rejection (price closes back inside the band or shows a strong rejection candle), then enter toward the middle band (SMA). Place SL beyond the recent extreme, size risk to 0.5%–1% equity, and manage TP at fixed R:R or the middle band — prefer this when the market is rangey or showing mean-reverting behavior, not during strong trending conditions.
1. Introduction
Bollinger Bands measure price volatility around a moving average and are a natural tool for mean-reversion trading. When markets are range-bound or when price stretches far from its mean, the probability of a pullback toward the center band (SMA) increases. This article gives a clear, actionable BB mean-reversion setup with entry confirmation, stop placement, and money management suitable for intraday traders.
Table of Contents
2. Strategy overview
- Instrument: FX majors, liquid indices, large-cap stocks — instruments with reliable band behavior.
- Timeframes: M5–M30 for entries; H1 for context (trend vs range).
- Indicators: Bollinger Bands (default 20 SMA, 2 standard deviations). Consider adding a volume/tick filter for confirmation.
- Core idea: Trade rejections at the outer bands back toward the middle band (mean), but avoid entries when bands are expanding into a strong trend.
Download Target Indicator and apply the settings in this strategy to reproduce the signals.
3. Setup
- Add Bollinger Bands: SMA 20 + 2σ (standard default). Optionally experiment with 18/2 or 20/1.8 for sensitivity tweaks.
- Use H1 to judge session behavior: flat/sideways = good for mean reversion; strong slope = avoid.
- Keep a small volume/tick indicator for confirmation of institutional interest on rejections.
4. Trading rules
4.1 Filter / Bias
- Prefer trades when higher timeframe shows range or weak trend. If H1 shows a strong directional trend (bands widening and price riding the outer band), avoid mean-reversion entries and consider trend-following alternatives.
4.2 Signal
- A valid signal is:
- Price touches or closes slightly outside the upper or lower band; and
- Price then closes back inside the band on a rejection candle (pin, engulfing, or strong-body reversal) or shows a clear wick rejection.
- Volume/tick increase on the rejection candle strengthens the signal.
4.3 Entry
- Conservative: enter on the close of the confirmation/rejection candle inside the band (market).
- Aggressive: place a limit slightly inside the band to try to improve execution.
- For scalping, you can enter smaller partial sizes and add another leg if price moves further to the extreme and then rejects.
4.4 Stop-loss
- Place SL a few ticks/pips beyond the recent extreme (the wick or the candle that touched/breached the band). Make sure SL keeps monetary risk within 0.5%–1% of account equity.
4.5 Take-profit & Trade Management
- Primary TP: the middle band (20 SMA) — a conservative, high-probability target.
- Alternative TP: fixed R:R (1:1 initial, then trail to 1:1.5–1:2), or scale out (50% at middle band, rest trailed).
- If price momentum favors continuation beyond the middle band, use ATR-based trailing to capture extended reversals.
4.6 Invalidation
- Invalidate if price closes decisively outside the band with follow-through (strong trend). Cancel entries if spreads widen or if news is imminent. Do not re-enter until price structure normalizes.
5. Position sizing & Risk Management
- Risk per trade: 0.5%–1% of equity (lower for scalps on small accounts).
- Calculate lot size from SL distance so monetary loss equals chosen % of equity.
- Cap number of concurrent BB reversion trades per session (e.g., 1–3) and enforce a daily drawdown stop.
6. Backtest & Validation
- Backtest across instruments and sessions (range vs trending). Include realistic spread/slippage. Track win rate, avg R:R, expectancy and max drawdown. Mean-reversion systems can be sensitive to regime changes — perform walk-forward validation.
7. When NOT to trade
- During trending regimes where price consistently rides the outer band.
- Around major economic releases or in low-liquidity sessions.
- When Bollinger Bands are strongly expanding (momentum breakouts), not contracting.
8. Variations & Optimizations
- BB + RSI: require RSI to show divergence or oversold/overbought confirmation at band touches.
- Double-Band method: use an outer band (e.g., 2.5σ) for extreme entries and inner band (2σ) for confirmations.
- Time-of-day filter: prioritize entries during session overlaps (London–NY) when liquidity is high.
- Adaptive bands: replace fixed 2σ with bands based on ATR-multiplier to adapt to volatility regimes.
9. Pre-trade checklist
- H1 shows range/neutral bias (not a sustained trend).
- Price touches/briefly closes outside outer band and then rejects back inside.
- Confirmation candle closed inside band (rejection).
- SL and lot size calculated (risk ≤ 1%).
- No imminent high-impact news; spreads acceptable.
10. Conclusion
Bollinger Bands mean reversion is a straightforward, reliable intraday method when used in the right market regime: identify controlled rejections at the bands, confirm with price action and volume, and manage risk tightly. It’s best deployed alongside a regime filter (H1 range vs trend) and robust backtesting per instrument.
11. FAQ
Q: Should I enter immediately when price touches the band?
A: No — wait for a rejection confirmation (close back inside the band) to reduce false entries during breakouts.
Q: Can this work on higher timeframes?
A: Yes — the same principles apply on H1/H4, though targets and SLs must be adjusted for larger moves and volatility.
