(4) Real Time Recognition & Execution Is More Difficult For Beginners
It is one of the most significant drawbacks or issues of using Bollinger Bands in technical charts. Reading & analyzing Bollinger Bands® on technical charts seems to be an easy task.
It is perhaps true when you are looking for chart patterns in hindsight i.e. after it has happened or developed. But, recognizing & executing different Bollinger bands chart pattern in real time is lot more difficult.
For example, you can find double top & double bottom chart patterns on almost daily basis. But, successfully identifying the true & strong chart pattern is not an easy task.
New & unskilled traders will always take sometime before they start recognizing these chart patterns in real time. Thus, beginners should use Bollinger bands without creating too much clutter & confusion when reading the chart.
(5) Inability To Indicate Strength Of Ongoing Trend
It is one of the most surprising criticisms or limitations of Bollinger Bands in technical analysis. Several traders are in a habit of buying stocks or bonds when they breached lower band.
Similarly, they prefer to sell stocks or bonds when they breached upper band. However, this can be an extremely dangerous situation. It is particularly true when the market develops a strong trend & price starts “walking the bands”.
This type of trend will create a new extreme price level for traders. But, you can counter this disadvantage of Bollinger Bands by using Average Directional Index (ADX) indicator.
The ADX indicator can successfully measure the strength of current trend. It usually rises during extreme trending situations while falls when market retraces in a range-bound state.
It will be a great way to filter out several false signals. Some of the valuable characteristics of ADX indicators include
(a) ADX starts rising from lower level —– Signaling the beginning of a trend.
(b) ADX has risen above 20-25 value —– Trend is confirmed.
(c) ADX has risen above 40-45 value —– Signaling the overbought levels.
(d) ADX starts consolidating or turning down —– Signaling the end of a current trend.
(e) ADX starts declining from higher level —– Consolidating or Indecision of the market.
- Bollinger Bands Limitations: Azureedge.net