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Statistics

The statistical concept most often inquired about in relation to Bollinger Bands is regression to the mean. 

Mean reversion --> All things will eventually come home; for statisticians home is the mean or average.

Thus as prices depart from the average, we should expect them to move back toward the average.

This is the statistical concept behind the technical terms ouerbought and oversold.

There is some evidence of regression to the mean demonstrated by financial instruments --> not as strong as it should be. 

--> Tags of the bands are not automatic buys or sells with the average as a target. 

This is precisely why the use of indicators to confirm tags of the bands is such a powerful concept.

With indicators we can make rational judgments about whether to expect regression to the mean or a continuation of the trend.

When the chosen indicator confirms a tag of the bands, you do not have a buy or sell signal; you have a continuation signal.

When a tag is unconfirmed, expect regression to the mean.

In this manner we combine information from statistics with information from technical analysis, relying on the strengths of each to improve our decision making. 

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