(12) Bollinger Bounce Occurs Due To Dynamic Support & Resistance Levels
It is one of the most significant characteristics of Bollinger Bands in technical charts. Bollinger bounce is the returning back of price towards middle band after reaching outer bands (either upper band or lower band).
If the price is reached the top of the Bollinger band then it is likely to revert back to middle band due to resistance levels on higher side.
Similarly, if the price is reached the downside of the lower band then it is likely to revert back to middle band due to support levels on lower side.
This bouncing continues until a strong breakout happens on either side. However, longer the time frame of this bouncing, the stronger these bands tend to be.
Several traders prefer to trade depending on these bounces. It tends to work best when market is ranging without any clear trend.
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(13) Overbought Or Oversold Conditions Can Extend In Strong Trend
It is one of the most important characteristics of Bollinger Bands in technical charts. Bollinger Bands® can indicate forthcoming trend in a security or bond if the prices move well above or well below outer bands.
Generally, a sharp move above the upper band indicates strength. However, a sharp slide below the lower band indicates weakness.
But, overbought conditions can extend further in a strong uptrend. In such situations, dips around middle band might provide buying opportunities.
Similarly, oversold conditions can extend further in a strong downtrend. In such situations, rallies around middle band might provide selling opportunities.
Thus, investors or traders should always trade while keeping stop loss order at breakeven point.
- Bollinger Band Analysis: MSGraphics