September 6, 2014

Bollinger band and reversals

Several times, I read in forums or receive emails saying so and so stock has hit upper Bollinger band so can I short. Or stock has hit lower Bollinger band so can I buy.

Just remember one simple rule - buy strength and sell weakness. For trend reversals, look at break of areas of support or resistance.

For eg. look at this chart of JP ASSOCIATES.

In March, stock hit upper level of BB and started rallying. The supports are shown here in green lines. At times, stock took a small pause after hitting upper BB or continued rallying. Nowhere was there a trend reversal.

The trend reversed only on break of 70.

After breaking 70, stock started correcting strongly and kept on hitting lower Bollinger band levels.  This has happened at least half a dozen times and not once has the stock reversed or rebounded.

Summary: use BB as indicator of strength or weakness or direction of a trend. Do not use this to anticipate trend reversals.

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