Bollinger Band Bounce

In strong downtrends, price can 'walk' along the lower band, touching it repeatedly while continuing to fall. You need confirmation (reversal candle, RSI turn, flat bands) to distinguish bounces from trend continuation.

Standard parameters are 20-period SMA and 2 standard deviations. These work well for most markets. Longer periods (25) and wider deviations (2.5) produce fewer but higher quality signals. Start with standard settings.

The middle band is the safer target - it's the mean reversion destination. Targeting the opposite band is more aggressive with higher reward but lower probability. Consider exiting 50% at middle band and trailing the rest.

Bandwidth measures how wide the bands are (volatility). Narrow bands (squeeze) suggest a big move coming - not good for bounces. Wide bands show high volatility. Normal bandwidth (2.5-4%) is ideal for bounce trades.

Bounce trades are typically short-term: 2-8 days. If price hasn't reached the middle band in 5-7 days, consider exiting. Don't hold indefinitely - mean reversion should happen relatively quickly if the setup is valid.

%B quantifies band position: 0 = at lower band, 1 = at upper band. For bounces, look for %B < 0.05 (very oversold) or > 0.95 (very overbought). Combine with RSI: %B < 0.05 AND RSI < 30 is a strong buy signal.

A band walk occurs when price repeatedly touches one band in a strong trend, creating new highs/lows. Signs: sloping bands, price consistently above/below middle band, strong momentum. Avoid: only trade bounces when bands are flat.

W-bottom: Price touches lower band, bounces, returns near band but makes higher low with RSI divergence. M-top: Price touches upper band, pulls back, returns near band but makes lower high with RSI divergence. These double-tested patterns have ~75% win rate.

John Bollinger designed the indicator with SMA and recommends it. EMA makes the bands more responsive but can generate more false signals. Stick with SMA unless you have specific backtested reasons to change.

Use weekly bands for major levels, daily for trading signals, 4-hour for timing. Ideal setup: weekly near band, daily at band, 4-hour showing reversal. When timeframes conflict, the higher timeframe takes precedence.

Squeeze occurs when bandwidth reaches multi-week lows. Advanced method: Bollinger Bands inside Keltner Channels indicates squeeze. When BB breaks outside Keltner, squeeze is breaking - trade the breakout direction, not a bounce.

Squeeze (<2.5%): Avoid bounces, prepare for breakout. Normal (2.5-4%): Best for bounces, standard sizing. Wide (4-6%): Bounces work but reduce position 20%. Very wide (>6%): Reduce 40% or use iron condors for premium selling.

Testing shows middle band target has highest win rate (70%) but leaves profit on table. Trailing stop captures more profit but lower consistency. Optimal: Exit 50% at middle band, trail remaining with stop below middle band.

Lower band: Sell bull put spreads below band (define risk). Upper band: Sell bear call spreads above band. Squeeze with low IV: Buy straddles. Wide bands with high IV: Sell iron condors. Band position informs strike selection.

Flat-band ranging markets produce best bounce results (74% WR, PF 2.65). Trending markets with sloping bands underperform (44% WR, PF 0.95). Monitor middle band slope - if |slope| > 1% over 5 days, skip bounce trades.