Mean Reversion
Bollinger Band Mean Reversion
Buying near the lower band expecting a bounce back toward the middle or the upper band, selling near the upper band expecting a fade back down, a trade that depends entirely on the market actually ranging rather than trending.
Watch the streak, then flip the regime
The bands recalculate every bar from a trailing 20-bar average and its standard deviation. A full traverse from one band to the other through the middle adds to the streak. Touching the same band again without crossing back through the middle first is a "walk," and it resets the streak to zero. Play it out, then switch the regime and watch how often walks happen.
How it works
- The bands are a moving average plus and minus a multiple of recent volatility. A 20-bar average sits in the middle, and the upper and lower bands sit a chosen number of standard deviations above and below it, recalculated fresh on every bar.
- A band-to-band trade needs price to actually cross back through the middle. Touching the lower band, bouncing halfway, and sliding back down to the lower band again isn't two trades, it's one stall that hasn't resolved yet. The streak counter above only credits a full traverse.
- A "walk" is the band's specific failure mode, and it's common, not rare. Price can hug the outside of a band for several bars in a row instead of reverting, because the band itself is dragging along behind a moving price rather than acting as a hard ceiling or floor.
- Regime is the entire game. The exact same band rule produces a long streak in a market that's genuinely oscillating and a string of walks in one that's trending, and nothing about the bands themselves announces which regime is currently in effect.
Where this breaks
Price can walk the band for many bars in a row instead of reverting
Bollinger Bands are built from a moving average, which means they follow the price with a lag rather than fencing it in. In a trending market, the price stays pinned against one band while the band itself slowly drifts along in the same direction, so every touch looks like a fade setup and almost none of them behave like one. Toggle to the trending regime above and watch the walk counter climb while the streak counter keeps resetting to zero, that's the exact mechanism that turns this trade from a high-probability bounce into a series of stops hit in a row.