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You can use Bollinger Bands to determine when prices are at extreme and possibly unsustainable levels. Bollinger Bands are generally considered to contain 80% of the price movements and a price move outside these bands is considered to be significant. The closer the prices move to the upper band the more overbought the stock is and closer the prices move to the lower band the more oversold the stock is.
As a rule, a candle closing outside Bollinger bands followed later by a candle closing inside the Bollinger bands serves as an early signal of a trend reversal. To explain further, if the price line moves out of the Upper Bollinger Band, the SELL signal is triggered when the price line moves into the Bollinger Band. On the other hand, if the price line moves out of the Lower Bollinger Band, the BUY signal is triggered when it moves back in. But this is not 100% correct all the time and you should be mindful of the other factors surrounding the stock.
It is also thought to be true that if the price is contained within a narrow Bollinger Band for a relatively longer period of time, the more aggressive and extensive the breakout is expected. It is similar to a quiet period before the storm.
Further, when price is trading near the upper or lower Bollinger Band line, there is a possibility of trend reversal. This is not always the case and other methods of confirming the trend reversal should be used.
As we always remind you, these indicators are not meant to be used as standalone tools. You should combine this with other basic trend analysis and other indicators for confirmation.
As a rule, a candle closing outside Bollinger bands followed later by a candle closing inside the Bollinger bands serves as an early signal of a trend reversal. To explain further, if the price line moves out of the Upper Bollinger Band, the SELL signal is triggered when the price line moves into the Bollinger Band. On the other hand, if the price line moves out of the Lower Bollinger Band, the BUY signal is triggered when it moves back in. But this is not 100% correct all the time and you should be mindful of the other factors surrounding the stock.
It is also thought to be true that if the price is contained within a narrow Bollinger Band for a relatively longer period of time, the more aggressive and extensive the breakout is expected. It is similar to a quiet period before the storm.
Further, when price is trading near the upper or lower Bollinger Band line, there is a possibility of trend reversal. This is not always the case and other methods of confirming the trend reversal should be used.
As we always remind you, these indicators are not meant to be used as standalone tools. You should combine this with other basic trend analysis and other indicators for confirmation.
