(10) Formation Of Double Top Or Double Bottom May Not Indicate Reversal Always
It is one of the most critical limitations of Bollinger Bands in technical analysis. Double top is a chart pattern that is formed at the top or upper band of Bollinger band. This chart pattern will closely resemble the shape of “M”.
It is characterized by an increase in price of a stock or index to form first top that have strong volume & a sharp price rise that closes outside upper Bollinger band.
This initial fall is referred as “automatic slide” & its low will serve as first level of support in the base building process. After this initial slide, the price attempts to retest the most recent high to test the strength of selling that came in at that top.
This type of pattern usually indicates reversal of the ongoing uptrend into a downtrend. But, it is not true always.
Sometimes, it can be formed even due to ongoing consolidations in which price continues to head in the trending direction after a fake breakout.
Similarly, ongoing consolidations can also be found with double bottom chart pattern without any major reversals. Thus, traders should not jump into a given script or bond quickly after seeing such patterns.
You should always look for additional indicators for confirmation. A blind trade can cost you severely in form of huge losses if done without applying thorough research.
(11) Adverse Conditions Can Quickly Damage Even Reliable Patterns
It is one of the most unbeatable limitations of Bollinger Bands in technical analysis. Stock markets are always prone to untoward incidents.
These unexpected incidents can occur either on national or international levels. But, they can have huge impact on the overall trend in the markets.
According to a post published in Fidelity, stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
For example, if a given stock or bond or index is on the verge of a good breakout followed by adverse news then it may fail to sustain its new trend or again enter in the Bollinger bands quickly.
It can even move on the opposite direction depending on the severity of news on the overall markets. Thus, traders should remain cautious even when additional indicators are also supporting the chart pattern.
It will be best strategy to always use a stop loss order to protect your investment in such situations.
- Bollinger Bands Limitations: Azureedge.net