Bollinger Breakout
BullishContinuationBeginnerA close above the upper Bollinger band. Exit on the first close under the middle band.
Verdict: CautionBitcoin 4H: 617 trades, won 42%, avg trade +1.1% vs random day +0.6%. Backtest
The middle band is the simple average of the last 20 closes. The upper band is two standard deviations above it, so it widens when prices swing and narrows when they are calm.
step 1/4
Trade rules
| Direction | Long (buy) |
|---|---|
| Entry | A candle CLOSES above the upper Bollinger band (the 20-candle simple average of the closes plus 2 population standard deviations) after the candle before closed at or below its band. Buy at that close. Exit at the first close below the 20-candle average (the middle band). Paper traded on 1-hour and 4-hour candles with that exit and a protective stop inside the candle at the middle band or 2 x ATR14 below the entry, whichever is lower; the encyclopedia backtest uses that stop, a target of two times the risk and a 100-candle limit. Tested in docs/research/2026-10-indicator-tests.md. |
| Cancelled if | Nothing to wait for: the setup and the entry are the same candle. A wick through the band that closes inside is not a signal. |
| Target | Two times the risk, projected from the breakout |
4 common mistakes
- Selling every touch of the upper band. That is the mean-reversion use of the bands; this rule buys the close above it.
- Expecting a big edge. In our test it beat random entries with the same exit by about 0.13% per trade on 1-hour candles and 0.4% on 4-hour candles, not enough to rule out luck.
- Forgetting the market's drift. Long-only rules made money in a rising market; most of the return came from being long, not from the signal.
- Using a different average or deviation and calling it the same rule. The tested version is 20 candles and 2 standard deviations.
Backtest
same rules every time · equal size · no fees · method| Market | Trades | Won | Avg trade | Random day |
|---|---|---|---|---|
| Bitcoin · 4H · 2017-2026 | 617 | 42% | +1.07% | +0.64% |
| US large caps (50) · 1D · 2016-2026 | 4079 | 43% | +1.57% | +1.97% |
Verdict: CautionBeat a random entry in some markets, not in others.
pattern +660%random +393%
pattern +6407%random +8036%