(2) Not A Directional Breakout Indicator
It is one of the most common problems or limitations of Bollinger Bands in technical analysis. Bollinger Bands® can easily expose extremes in the price action & compression patterns that are formed prior to breakouts.
But, the direction of expected breakout can’t be told with certainty. It is because these bands indicate trading price volatility only.
Bollinger bands can only help us to make a calculated guess regarding when to expect an anticipated change in a given script. Therefore, traders need to combine it with additional indicators that give directional signals.
These additional indicators should be volume & quantity based for determining the possible direction of breakout.
Some of the additional indicators for proper analysis include Volume Bars, Balance of Power (BOP), accumulation/distribution indicator, Volume oscillator, candlestick chart patterns, etc.
(3) Not Reliable In Certain Market Conditions
It is one of the most authentic disadvantages or limitations of Bollinger Bands in technical analysis. Bollinger Bands® are not reliable indicator for all types of market conditions or investors sentiments.
It assumptions are viable or works for flat, range-bound markets or gently trending markets only. These are the time periods during which market’s perceptions are unchanged.
Under these conditions, price tends to fluctuate between upper band & lower band. This bouncing of Bollinger bands is quite comparable to a ball bouncing between floor & ceiling.
On the other hand, they are not ideal indicators in strong trending markets (either uptrend or downtrend), moderately trending with speculative actions, or trading range market conditions.
They are also not reliable during topping market conditions. Bollinger bands can compress during certain times in tops but this compression is often not sufficient enough to provide a warning signal.
Thus, Bollinger bands are not reliable when market perceptions are changing quickly.
- Bollinger Bands Limitations: Azureedge.net