Bollinger Bands are a statistical method, used for deriving information about the prices and volatility of a certain asset over time. To obtain the Bollinger Bands, we need to calculate the moving average and standard deviation of the time series (prices), using a specified window (typically, 20 days). Then, we set the upper/lower bands at K times (typically, 2) the moving standard deviation above/below the moving average.
The interpretation of the bands is quite sample: the bands widen with an increase in volatility and contract with a decrease in volatility.
In this recipe, we build a simple trading strategy, with the following rules:
- Buy when the price crosses the lower Bollinger Band upwards.
- Sell (only if stocks are in possession) when the price crosses the upper Bollinger Band downward.
- All-in strategy—when creating a buy order, buy as many shares as possible.
- Short selling is not allowed.
We evaluate the strategy on Microsoft's stock in 2018. Additionally, we set the commission to be equal to 0.1%.