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Friday, September 07, 2012 8:08:25 PM
The single biggest mistake that many Bollinger Band novices’ make is that they sell the stock when the price touches the upper band or conversely buy when it touches the lower band. Bollinger himself stated that a touch of the upper band or lower band itself does not constitute a buy or sell signal. Not only have I seen, but I have also traded this Bollinger Band strategy as a continuation trade. Using other technical indicators and pattern recognition, you can actually trade in the direction of a stock that is closing above or below the upper and lower band.
Take a look at the example below and notice the tightening of the Bollinger Bands right before the breakout and to my point above, a price penetration of the bands cannot alone be considered a reason to short a stock or sell it. Notice how the volume exploded on that breakout and the price began to trend outside of the bands. These can be extremely profitable setups.
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