Bollinger Bands are two lines drawn above and below a 20-day average of the price, two standard deviations away. A standard deviation measures how far the price usually moves, so the bands spread out when a stock gets jumpy and pull in when it calms down. This rule buys when the price closes above the upper band and sells when it closes back below the 20-day average. It only buys.
The idea is that a close above the upper band means a strong move is starting. Often it is the end of one instead, and the price drifts back to the average.
It made money on four of the five stocks, lost on IWM, and trailed holding on all five. It only made a dozen or so trades on each, so a couple of good or bad trades decide each result.
In the table, the biggest drop is the most the account fell from a high point before it recovered.
| Stock | With the strategy | Just holding | Trades | Biggest drop | Backtest |
|---|---|---|---|---|---|
| SPY | $10,396 (+4.0%) | $14,692 (+46.9%) | 10 | -5.6% | See the backtest |
| QQQ | $11,393 (+13.9%) | $16,717 (+67.2%) | 11, plus 1 still open | -11.5% | See the backtest |
| IWM | $8,932 (-10.7%) | $13,521 (+35.2%) | 13 | -18.5% | See the backtest |
| AAPL | $13,377 (+33.8%) | $19,649 (+96.5%) | 13 | -16.3% | See the backtest |
| MSFT | $11,461 (+14.6%) | $12,168 (+21.7%) | 13, plus 1 still open | -15.7% | See the backtest |
How we tested
We ran the textbook rules on SPY, QQQ, IWM, Apple and Microsoft from Mar 26, 2024 to the end of last month, in the same Backtest tab you can use. Every strategy on this site starts on the same day, the first day the slowest of them, the golden cross, could trade.
Every test starts with $10,000 and puts the whole balance into each trade, with no borrowed money. Costs are the tester's defaults for stocks: half a cent a share in commission and a cent of slippage on every fill. Slippage is the gap between the price you wanted and the price you got.
"Just holding" buys the same stock on the first day of the test and keeps it to the end.
Questions
Does a Bollinger Band breakout beat buying and holding?
No. It didn't beat just holding on any of the five stocks after costs, even though it made money on four of them.
Can I change how wide the bands are?
Yes. The Backtest tab lets you set the average's length and how wide the bands are before you run it. If you pick the version that did best on these dates, test it again on dates you didn't pick it on before you trust it.
Can I test it on a different stock?
Yes, with a paid plan. Press "Try it yourself" to open the Backtest tab with the Bollinger Band breakout already loaded, then change the stock. A backtest of the Bollinger Band breakout needs more history than a free account can reach.