Bollinger Band Mean Reversion

Entry Logic

• Long entry: Price touches or closes below the lower Bollinger Band (20, 2).
• Short entry: Price touches or closes above the upper Bollinger Band (20, 2).
• Confirmation: Subsequent candle shows momentum exhaustion (e.g., pin bar, doji) or starts to reverse back inside the bands.
• Timeframe: 5-minute, 15-minute.
• Location: Fading extended moves away from the 20-period moving average.
• Market Condition: Ranging or weakly trending markets.

Exit Logic

• Profit Target: Take profit at the 20-period moving average (the Bollinger Band basis).
• Scaling Out: Exit 50% at the 20 MA, trail the rest.
• Trailing Stop: Use the middle band or a 1-bar low/high trailing stop.
• Signal Failure: Exit if price closes outside the band for a second consecutive period.
• Opposite Signal: Not applicable for this strategy.
• Time Expiration: Exit after 5-7 bars if the target is not reached.
• Momentum Loss: Exit if price stalls before reaching the 20 MA.

Stop Loss Structure

• Hard Stop: Place stop 1 ATR (14) outside the entry candle's high/low.
• Soft Stop: A close back inside the bands after a failed breakout.
• Max Dollar Loss: $500 per trade.
• Max Percent Loss: 1% of account capital.
• Structural Stop: Place beyond a recent pivot high/low outside the bands.

Risk Management Framework

• Risk Per Trade: 0.5% of account equity.
• Daily Limit: 3 losing trades.
• Weekly Limit: 5% account drawdown.
• Max Drawdown: 15% from peak equity.
• R:R Requirement: Minimum 1.5:1.

Position Sizing Model

• Sizing Approach: Fixed fractional (0.5% of account).
• Volatility Adjustment: Reduce size if ATR expands by >50%.
• Conviction Sizing: A+ setups get full size, B setups get half size.
• Scaling In: Not recommended.
• Scaling Out: At 20 MA and the opposite Bollinger Band.

Trade Filtering

• Market Conditions: Avoid strong trending markets.
• Setups: Require a clear touch and rejection of the band.
• Instruments: High-volume ETFs (SPY, QQQ) and liquid stocks.
• Time Restrictions: Avoid the first 15 minutes of the market open.
• Chop/News Avoidance: Do not trade during major news events.

Context Framework

• Trend Direction: Best in non-trending, sideways markets.
• VWAP Relationship: Fade moves away from VWAP.
• MA Relationship: Price should be extended from the 20 and 50 MAs.
• Range Location: Trade at the upper/lower extremes of the daily range.
• Higher TF Alignment: Higher timeframe (60-min) should also be in a range.

Trade Management Rules

• Breakeven: Move stop to breakeven after price moves 1R in your favor.
• Scale Out: At the 20 MA.
• Add Size: Not applicable.
• Fast vs Slow Moves: Fast moves to the bands are better setups.

Time Rules

• Optimal Window: Mid-morning and mid-afternoon.
• Times to Avoid: Opening and closing bells.
• Session Notes: More effective in less volatile sessions.

Setup Classification

• A+ Setup: Clear rejection of the band with a reversal candle, in a ranging market.
• A Setup: Touch of the band with a stall in momentum.
• B Setup: Price pierces the band slightly before reversing.
• C Setup: Price walks the band in a strong trend.

Market Selection Criteria

• Instruments: SPY, QQQ, IWM, large-cap stocks.
• Volume: > 2 million shares daily average.
• Volatility: ATR should be within a normal range, not excessively high or low.

Statistical Edge Metrics

• Win Rate: 60-65%.
• Avg Win: 1.5R.
• Avg Loss: 1R.
• Profit Factor: 1.8.
• Expectancy: +0.2R per trade.

Failure Conditions

• Market Conditions: Strong directional trends.
• Specific Scenarios: "Walking the bands" where price continuously pushes against the band.

Psychological Rules

• Discipline: Must wait for price to hit the band, do not chase.
• Patience: Await confirmation before entry.

Advanced Components

• Regime Detection: Use ADX < 25 to identify ranging markets.
• Filters: Avoid stocks with recent news or earnings.
• Correlation: Ensure correlated assets are not giving conflicting signals.
• MTF Alignment: 60-minute chart should confirm a non-trending state.

Location

• Strongest: In established, low-volatility ranges.
• Weakest: During strong breakouts or trend continuations.