Technical analysis plays an important role in stock trading, providing traders with valuable insights to make informed decisions. Among the various tools available, Bollinger Bands have gained great popularity. If you want to invest in stocks and are looking for technical analysis to enter or exit stocks, this tool will help you. This article covers the following concepts: bollinger bands, explores effective usage and analyzes two real-world examples showing 7%-10% returns in 3-4 months. We also understand the risk factors involved in such technical analysis.
Also read: 10 Mutual Funds Created 10,000 SIP up to Rs 52 Million
What are Bollinger Bands for Stocks?
bollinger bands It consists of three lines plotted on a price chart: middle band, upper band and lower band. The middle band is usually the 20-period simple moving average (SMA) of the asset price. The upper and lower bands of the chart are calculated based on the standard deviation of price from the central band of the chart.
The purpose of Bollinger Bands is to provide a visual representation of price volatility and potential trading opportunities. The bands widen when volatility increases and narrow during periods of low volatility. Traders can use these bands to identify overbought or oversold potential and determine potential price reversals.
To better understand these three lines, see the Reliance example here. Here is a screenshot of the Zerodha daily chart for the last 6 months.
How to use Bollinger Bands?
In order to effectively utilize the Bollinger Bands, traders can consider the following strategies.
1) Identify overbought and oversold conditions: If the price hits the upper band, it means the stock is overbought, which could lead to a potential price drop. On the other hand, if the price hits the lower band, it suggests that the stock is oversold and could indicate a possible price rally.
2) Discovery of price breakouts: If the price breaks out of the Bollinger Bands, it may indicate a large price move. Traders often see this as a trend continuation signal, allowing them to decide whether to enter or exit a position.
3) Volatility Squeeze Evaluation: When the Bollinger bands contract and move closer together, they indicate periods of low volatility. Often followed by a period of high volatility, the bands widen again. By paying attention to these periods of volatility pressure, traders can anticipate potential price breakouts.
you may like: Which stocks are the best to invest in, according to ChatGPT?
How Bollinger Bands Work – Explained with two stocks as a real-life example
Let’s look at two real-life examples to demonstrate the application of Bollinger Bands. These screenshots are taken from specific stocks of Zerodha and Daily Candles.
1) HDFC Bank: According to the Bollinger Bands, I got two entry points and two exit points in the last few months. (Click the photo below to enlarge)
Initial Entry – Rs 1,560, Exit within 3 months at Rs 1,700 (Profit 8.9%)
2nd entry – Rs 1,540, exit at Rs 1,660 (7.7% profit) – within 3 months
2) Infosys: This stock has recently fallen into disrepair. However, see the beauty of Bollinger Bands technical analysis. I got 2 entry points and 2 exit points. (Click the photo below to enlarge)
Initial Entry – Rs 1,450, Exit within 3 months at Rs 1,600 (Profit 10.3%)
2nd Entry – Rs 1,230, Exit at Rs 1,320 (7.3% profit) – Within 3 months
Risks of using Bollinger Bands
Bollinger Bands are a powerful tool, but it is important to be aware of the risks associated with them.
Incorrect signal: Like any technical indicator, Bollinger Bands are not foolproof. False signals can occur and relying solely on them can lead to erroneous trading decisions.
Whipsaw movement: In volatile market conditions, prices can move back and forth between bands quickly, causing whip-like movements. Traders should exercise caution and consider combining Bollinger Bands with other indicators to confirm signals.
Limited applications: Bollinger Bands are most effective in trending markets. In range-limited or volatile markets, the signal provided by a band can be unreliable, making it essential to adapt to varying market conditions.
How can we identify such stocks?
Several scenarios are currently available on the market. But first select a few stocks you want to invest in, then add the Bollinger Bands indicator (from the Indicators section where the stock candlestick chart is shown) to see if it’s the right time to enter. It is recommended to check.
What are the 5 stocks that the Bollinger Bands are giving buy signals to right now?
Below is a sample of Nifty50 stocks trading at the lower bounds where Bollinger Bands technical analysis gives buy signals at the time of writing. They are shown for educational purposes only and are not intended as stock endorsements. You can study them and track the accuracy of your technical analysis.
#1 – Wipro – Rs 381
#2 – TCS – Rs 3,174
#3 – Kotak Bank – Rs 1,830
#4 – ICICI Bank – Rs 926
#5 – SBI – Rs 566
Also read: Stocks recommended by Google AI Bard for long-term investment
Conclusion: Bollinger Bands serve as a valuable tool for traders, helping to identify price volatility, potential entry or exit points, and possible price reversals. Understanding how to use Bollinger Bands effectively and being aware of the risks involved can help traders enhance their technical analysis and make more informed trading decisions. However, it is important to remember that Bollinger Bands should not be used in isolation, but as part of a comprehensive trading strategy that incorporates other indicators and analytical techniques. With practice and experience, traders can harness the power of Bollinger Bands to improve their overall trading performance.
Disclaimer: This technical analysis is provided for educational purposes only. Investors should be able to understand how this concept works in a real-life example, and are not a recommendation to invest in these stocks. I haven’t invested in any stocks at the time of writing, but I may invest in the future.
Like our tips and analysis? Would you like to share this on Facebook and Twitter?
![Suresh KP](https://myinvestmentideas.com/wp-content/uploads/gravatar/suresh-kp-myinvestmentideas.com-founder.jpg)