Bollinger Bands (BB)
Bollinger Bands are a versatile volatility-based indicator that consists of a moving average (typically the 20-period SMA) and two bands plotted above and below it at a specified number of standard deviations. These bands expand and contract with market volatility and can help identify overbought/oversold conditions, breakouts, and potential reversals.
Why Use Bollinger Bands in your strategy?
Bollinger Bands are excellent for understanding price volatility and identifying high-probability reversal zones or breakout opportunities. Here’s what makes them useful:
Detects volatility compression and expansion.
Helps spot price extremes where reversals are more likely.
Signals breakouts when price breaks outside the band after a squeeze.
Effective for both range-bound and trending market conditions.
Visual and beginner-friendly, yet powerful when used with other indicators.
BB Settings in the AlgoBuilder
When adding BB to your strategy inside the AlgoBuilder, you’ll be able to customize or use the following parameters:
Basis Length
Period used to calculate the central moving average (default: 20)
Source
Price source (close, open, high, low)
Std Dev Multiplier
Number of standard deviations to plot the upper and lower bands (default: 2.0)
Timeframe
Timeframe for the Bollinger Band calculation (e.g. 1m, 5m, 1h)
📈 Example Usage for Entry Conditions
Mean Reversion LONG: Enter long when price touches or briefly dips below the lower Bollinger Band. → Suggests price may be oversold and due for a bounce.
Breakout LONG: Enter long when price closes above the upper band after a squeeze. → Indicates strong momentum and possible trend continuation.
Mean Reversion SHORT: Enter short when price touches or exceeds the upper Bollinger Band. → Suggests overbought conditions and potential pullback.
Breakout SHORT: Enter short when price closes below the lower band after a squeeze. → Can signal start of new bearish trend.
🎯 Take Profit / Exit (Long) Examples
Exit at Middle Band (Basis): Take profit when price reverts to the mid-band (moving average). → A common mean reversion target.
Exit if Price Closes Below Lower Band Again: → Might indicate further downside volatility and invalidation of the long setup.
🎯 Take Profit / Exit (Short) Examples
Exit at Middle Band (Basis): Take profit when price retraces back to the mid-band. → A natural spot for mean reversion.
Exit if Price Closes Above Upper Band Again: → Suggests momentum reversal or breakout invalidation.
Tips for Using Bollinger Bands in the AlgoBuilder
Combine BB with RSI to filter out false signals (e.g., only take BB longs if RSI is oversold).
Use BB squeezes (tight band contraction) as a pre-breakout signal.
Try longer periods (e.g., 50) to smooth out the bands for macro trend filtering.
Great for building hybrid strategies — trend-following breakouts or counter-trend mean reversions.
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