(14) Bollinger Bands Can Quickly Adapt To Changing Market Conditions
It is one of the most unbeatable characteristics of Bollinger Bands in technical charts. Bollinger Bands® are non-static indicators that can change their shape depending on recent price action.
They can expand & contract as the volatility of underlying security or bond increases & decreases. This will ultimately create a very accurate trending envelope. This behavior makes it a popular indicator amongst traders & investors.
Generally, price stays close to outer band (either upper band or lower band) during strong trend (either uptrend or downtrend).
If price pulls away from outer band as trend continues, it indicates fading momentum. However, repeated pushes towards the outer band without reaching it shows a lack of power.
A break of the moving average is the signal the end of a trend. On the other hand, various other standard indicators are usually lagging in this characteristic.
Thus, you can use Bollinger bands to read market & trend strength. It will help you to time entries during range-bound markets as well as to find potential market tops.
(15) Bollinger Band Trading Strategy Differs From Trader To Trader
It is one of the most important guidelines of using Bollinger Bands in technical analysis. Bollinger Bands® trading strategy is not unique for all kinds of traders & investors.
It can differ from one trader to another & even for same trader at different times. It is always desirable for every trader to understand how to use Bollinger bands.
Ever trader should find his/her ideal entry/exit points of trade. This will in turn depend on concerned security or bond as well as risk levels of the investor or trader.
For example, if you are comfortable with buying near lower band then go for it. However, if you find more comfort while making short positions near upper band then it will be best strategy for you.
Generally, the price of underlying security or bond fluctuates between upper & lower band for 85% to 90%. Therefore, you are likely to make consistent profits as long as price range is not breached.
- Bollinger Band Analysis: MSGraphics