Reversal with Bollinger bands is an effective trading method, which is easy to implement. The concept of this trading method is to fade stocks when they get outside of the bands. Experimenting something different, traders may apply candlestick analysis with this strategy. The way to implement the candlestick along with this strategy is to wait and observe the stock, which is shorted when it gets out of the upper band limit. The indication of the stock being corrected in near future is when the stocks slit up and then is closed near its low and then it is outside the Bollinger bands. In that case, traders may occupy the short position with three target exit areas upper band, middle band and lower band.
Other patterns of Bollinger Bands in technical analysis
Generally, the Bollinger bands strategy engages a double bottom patterns. In this pattern, the initial bottom of the double bottoms and Bollinger bands combination has a strong volume. Another movement observed in this formation is sharp price pullback, which gets close outside of the lower Bollinger band. These kinds of moves are called an automatic rally. The initial level of resistance is provided by the high of the automatic rally. This occurs before the stock moves higher.
When the rally starts, the price tries to retest the current lows that are set in order to check the strength of the buying stress. Now this pattern represents that there is downward pressure on the price of the stocks. The price of the stock has fallen down. Now there will be more buyers than sellers. Traders need to keep in mind the volume factor also.
Precautions to Be Taken
There is one very common mistake done by the traders who use the Bollinger band strategy for the first time or are beginners. The Bollinger band users sell the stock when the price touches the upper band and vice versa, they buy the stock when the price of the stock touches the lower band. The Bollinger never indicates the buy signal or the sell signal when the price touches the lower band and upper band respectively. This Bollinger band strategy is traded as a continuation trade. Traders can trade in the direction of the stock, which is usually closed above or below the upper band and lower band with the use of technical indicators and the chart patterns.