Combination of Bollinger Bands and Relative Strength Index
Promising opportunities for trading arise when Bull and Bear are involved in a power struggle. Professional traders have developed ways to take advantage of such opportunities. In the following article, such a possibility is described – a trading strategy, the Bollinger Bands combined with the Relative Strength Index (RSI). The Bollinger Bands and the Relative Strength Index (RSI) trigger reliable signals when they are not combined in the usual manner. It is not easy for the Bulls to drive up the prices when the market is very weak, because the Bears are putting up a tough resistance. Likewise, it is not easy for the bears to attack the bull and win, if they have a lot of perseverance. The trick is to look out for the weak points in the Bulls before going short or to locate weaknesses in the Bears locate before going long. A signal may be formed when the price is moving very carefully in an overstretched market. We will be better Traders, if our trading-approaches are running counter to the conventional approach. Sometimes we learn our best lessons from our worst mistakes. The development of the following trading strategy is the result of a longstanding examination of the markets.
Let’s look at the four possible combinations. Preferably, we use 4-hour charts for this strategy:
- The course touches the lower Bollinger Band (BB); Relative Strength Index (RSI) crosses above 30; Buy signal. We want to go long when the market appears to be oversold. But only when the course is showing signs of turning upwards. Then the RSI moves up and leaves the oversold zone.
- The course touches the upper BB; RSI crosses below 70; Sell signal. We want to go short when the market appears to be overbought. But only when the course is showing signs of turning downwards. Then the RSI moves downward and leaves the overbought territory.
- The course touches lower BB; RSI is less than 30; Buy signal. We want to go long when the market appears to be oversold and the two indicators have confirmed this. Then the RSI also moves downward, in the oversold zone.
- The course touches upper BB; RSI greater than 70; Sell signal. We want to go short when the market appears to be overbought and the two indicators have confirmed this. Then also the RSI moves upward, in overbought territory.
In order improve the reliability of the strategy and to protect us from less good signals, we put the rule that none of the above signals will be used if runs against the exponential moving average with the period 50 (exponential moving average; short EMA). In addition we disregard both the signal and the EMA (50), if the EMA (50) has no direction. It must be clear that the EMA (50) tends upward or downward.
In the pictures the Bollinger Bands are colored magenta, while the Relative Strength Index is highlighted in blue (points 70 and 30 are marked black with dotted lines). The EMA (50) is drawn in black. Figure 1 shows a good example of when we usually do not trade in a market. The GBP / USD moved generally in a sideways trend and the EMA (50) was flat. During the 07 July the lower Bollinger band was breached and the RSI also provided an entry signal, but nevertheless we refrained from a long position. The EMA (50) was located here in the opposite direction. In Figure 2, we went in GBP/CHF in a long position in early July (green line). The price was driven to the lower Bollinger Band and RSI 14 periods fell immediately below the value of 30. After a few days our target of 200 plus pips has been reached. This trade was made because the EMA (50) trended upward. Here, it should be given priority to the dominant bias against a beginning counter-trend movement. When the EMA (50) tends down, we use only bearish signals. In Figure 3, we can accurately recognize this at the EMA (50). On December 17, 2014, we followed a Short-signal (red line) after the RSI was just below 70 and the price reached the upper Bollinger band. In less than 24 hours, our target has been reached (green line). On January 05, 2015, we were able to make another short trade in the same way. It was important that the RSI by entering the short position was at no time below the 50 mark – and all this in the context of a downtrend.
Sometimes the signals are just not when we need them. This would mean to wait for the right moment. With this strategy we showed four ways to optimize the Bollinger bands and derive appropriate trading signals. «
Azeez Mustapha. Azeez Mustapha is an analyst at the Instaforex Companies Group, Blogger on Advfn.com and freelance writer. He works as a provider of trading signals at various sites and is a senior analyst at www.paxforex.com. email@example.com