Bollinger Bands® is not a perfect indicator in all scenarios. These basic limitations of Bollinger Bands in technical analysis must be known.
Every technical indicator is having some pros & cons regarding its use & effectiveness in predicting a trend. Bollinger Bands is not a different tool in this regard. They don’t produce reliable information all the time.
They do have some drawbacks that you have to encounter when working with them. Therefore, traders should apply band settings that work (for most of the time) for a concerned script or asset being traded.
According to a post published in The Balance, ideal Bollinger Bands setting vary from market to market, and may even need to be altered over time even when trading the same instrument.
Once the indicator is set up & seemingly working well, there will still be periods when it can produce false signals. Thus, a good trader is one who can apply additional indicators along with Bollinger bands before coming to a final decision. Here are 15 drawbacks or issues of using Bollinger Bands in technical charts:
[You can also watch an exciting video on this post from GetUpWise channel on YouTube.]
(1) Don’t Tell When Selling Pressure Or Buying Pressure Will End
It is one of the most popular limitations of Bollinger Bands in technical analysis. Bollinger Bands® are good technical indicators to tell oversold & overbought market conditions.
If the stock price has breached its upper Bollinger band then it will be considered as overbought condition. On the other hand, if the stock price has breached its lower Bollinger band then it will be considered as oversold condition.
However, there are certain situations when this strategy is correct but still the selling pressure or buying pressure continues. There is no way to know when the selling pressure or buying interest will come to an end.
Therefore, traders & investors are advised to use protection in form of stop loss order. You can better use a 5-point stop to protect your investment in an untoward situation. It will help you to minimize your losses if the price continues to breach Bollinger bands.
- Bollinger Bands Limitations: Azureedge.net