Bollinger Bands. a very powerful indicator when it comes to trading. They are very good at showing strong supports and resistances. In Article, I pair them with the RSI indicator. This strategy is easy to use, and I show you exactly how to use it effectively.
In order to gain insight into the market’s dynamics, some traders need to use technical indicators. Most of the time, they must combine these indicators to improve the accuracy with which they read market opportunities.
There are number of technical indicator combinations to choose from these days. With so many options available, traders must be able to select the ones that are suitable to them and their trading styles. Even so, it’s nearly impossible to stick to a single strategy throughout one’s trading career. As a result, traders must be adaptable and versatile in their use of various tools and indicators in order to adjust their strategy in response to market conditions.
Among the various combinations available, the Bollinger Bands and Relative Strength Index (RSI) combo strategy is well worth a shot. This is how it works:
How Bollinger Bands Work
Bollinger Bands were created in the 1980s by John Bollinger, a well-known American trader and financial analyst. The indicator is frequently used to identify opportunities when an asset is oversold or overbought.
To be more unique, the middle band, also known as the moving average line, averages out the closing prices in the first 20 days as the first data point. The following step would be to take the first price, add the price on day 21, calculate the average, and so on. The upper and lower standard error measure how far or close the data points are to the middle band. Prices are very close to the mean when the standard error is low. When the standard deviation is high, the prices are far from the mean.
How the RSI Works
J. Welles Wilder Jr., an American technical analyst, created the Relative Strength Index (RSI) in 1978. The RSI is a momentum indicator that tracks the speed and change of price movement over a given time period. An RSI is usually used to assess whether the market is overbought or oversold, but it can also be used to decide support and resistance levels.
RSI values are displayed in a range of 0 to 100 as an oscillator indicator (a line graph that moves between two extremes). If the RSI rises above 70, the asset is considered overbought and a sell signal is issued. If the RSI falls below 30, the asset is considered oversold and a buying signal is generated. However, these forecasts are not always correct. Some traders would wait for the indicator to rise above 70 and then fall, or to fall below 30 and then rise again before selling.
Bollinger Bands and RSI Combo Strategy
After knowing the basics of both Bollinger Bands and RSI, we can now combine the two indicators and see why this combination strategy is so popular among traders worldwide.
The strategy is actually quite simple and clear. First and probably most important, want to look for prices that fall into either the upper or lower band. Such factors usually cause the price to reverse because it has reached an extreme. As previously stated, if the price reaches the upper band, it indicates overbought, and if the price reaches the lower band, it indicates oversold.
Meanwhile, keep a close eye on how the RSI value goes up above 70 or drops below 30. An RSI value greater than 70 is considered overbought, while one less than 30 is considered oversold. It is important to note, however, that the leading indicator provides an early warning signal before the trend reverses. That is, when the RSI reaches oversold or overbought area, the price may not react immediately. It may take a few days for the trend to begin to reverse.
That being said, if an asset’s price reaches the upper band of the Bollinger Bands while the RSI exceeds 70, you can interpret this as an overbought condition and sell the asset. Wait for a buy signal when the price reaches the lower band of the Bollinger Bands and the RSI falls below 30.
Remember that for a strong signal, the Bollinger Bands and RSI should both be moving in the same direction. If the two indicators do not match or show the same signal, do not act immediately. For example, if the price is falling and eventually reaches the lower Bollinger Band, but the RSI is not below 30, the asset may not be as oversold as the Bollinger Bands appear to indicate. As a result, don’t buy the asset just yet because the downtrend may continue.
Another tricky thing about this strategy is that the price can stay in an overbought or oversold position for a long time, perhaps even weeks or months. So even if both the Bollinger Bands and the RSI show strong overbought or oversold situations, there’s still a possibility that the reversal won’t happen right away.
Further more, you can improve the strategy by adding more confirmation signals. The RSI divergence is the first. It essentially refers to when the asset price moves in the opposite direction of the indicator. An RSI divergence can be either positive or negative. If a bearish divergence occurs, it indicates the possibility of a downtrend and is a strong indicator to sell the asset. In contrast, a bullish divergence indicates a possible uptrend and is a strong indicator to buy the asset.
The candlestick patterns are the second type of confirmation you can use. Candlestick patterns can reveal a lot of information if you pay close attention to them. Analyze the effects of the candlestick patterns at the RSI divergence point. In a downtrend reversal, we would look for bullish patterns such as a bullish hammer or dragonfly doji. When an uptrend reverses, we should look for bearish patterns such as bearish engulfing or gravestone doji. Also, remember that the price must close higher than the previous candlestick price.
Bollinger Bands + RSI Trading Strategy tested 100 TIMES
Bollinger Bands Trading Strategy also known as Bollinger Bands Indicator Strategy for Stock Trading and Forex Trading Tested 100 Times so you can know the real profit potential and make money in Intraday trading and Swing Trades. Can Bollinger Bands Strategy Indicator be profitable.
Both the Bollinger Bands and the RSI indicators are well-known on their own, but combining them would result in a much more comprehensive analysis. Using this strategy, we can assess the current price position and forecast when the price will reverse after reaching oversold or overbought levels.