Does the Bollinger Band squeeze strategy work on crude oil?

Key results

Total return

+73.7%

Buy & hold: +94.6%

Annual return (CAGR)

+5.7%

Buy & hold: +6.9%

Max drawdown

-30.2%

Buy & hold: -86.4%

Win rate

36.21%

Profit factor

1.21

Trades

348

Longest losing streak

12 trades

Period

Oct 2, 2016 to Oct 1, 2026

10 years

Market

WTI/USD

4-hour

Equity curve vs buy & hold

Returns year by year

Calendar years, compounded from monthly results. The first and last years can be partial.

The Bollinger Band squeeze is a volatility idea popularised by John Bollinger himself: when the bands pinch together, the market is coiling, and the next expansion often starts a strong move. Trading guides such as this squeeze walkthrough turn it into a breakout rule. Crude oil, a market known for long quiet stretches followed by violent moves, is a natural place to test it.

The rules we tested

• Market and timeframe: WTI crude oil against the US dollar, 4-hour candles.
• Period: 2 October 2016 to 1 October 2026.
• Squeeze condition: the Bollinger Band width (20 periods) is below 0.7 times its own recent average at least once in the last 5 candles, meaning the bands are about 30% narrower than usual.
• Long entry: squeeze condition met and the close crosses above the upper band.
• Short entry: squeeze condition met and the close crosses below the lower band.
• Exit: longs close when the price crosses below EMA(20), shorts when it crosses above EMA(20). A fixed protective stop also applies.
• Costs and sizing: 0.02% commission per side, full position size on a 10,000 starting balance.

What the backtest shows

The strategy returned +73.7% (5.7% a year) against +94.6% (6.9% a year) for buying and holding WTI. On return alone, it lags. On risk, the comparison flips: the strategy's worst drawdown was 30.2%, while holding oil meant sitting through an 86.4% drop, the collapse of early 2020 when WTI briefly went below zero.

The trade profile is that of a breakout system. 36% of the 348 trades won, but the average win (3.43%) was about twice the average loss (1.61%), for a profit factor of 1.21. Nearly all trades (325) ended on the EMA(20) exit, and only 23 on the hard stop.

The yearly table is where the honesty matters. 2020 alone produced +54.2%, with 2018 (+22.1%) and 2019 (+14.6%) also strong. Since then the strategy has been flat to negative: 2021 made only +1.6%, 2022 lost 5.6%, 2026 has lost 4.6% so far, and every year from 2022 onward finished below zero. Much of the ten-year result depends on one exceptional year.

Commission is moderate here: 348 round trips at 0.04% add up to about 14% of the position size over the decade.

Why it works, and where it fades

A squeeze breakout earns its money when a quiet market suddenly starts trending, and the EMA(20) exit lets the trade run as long as the trend holds. 2020 was the extreme case: oil moved further and faster than in any other year of the sample. In calmer years, many breakouts fail. Price pokes through the band, the EMA(20) exit triggers on the first pullback, and the trade closes with a small loss. When most breakouts are false, the occasional big trend has to pay for all of them, and since 2022 there have not been enough of those.

What you could test next

• Tighten the squeeze threshold (0.6 instead of 0.7) so only deeper compressions qualify.
• Use a slower exit, such as EMA(50), so the trades that catch a trend stay in it longer.
• Add a trend filter and only take breakouts in the direction of a long moving average.
• Test the same rules on another volatile commodity, to see whether the result holds outside oil.

Methodology and assumptions

Frequently asked questions

Reproduce it, then change it

Every number on this page comes from the Backtrex engine. Rebuild the strategy in the app, then change the market, the timeframe or a parameter and see whether the result holds.

Other backtests