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Essay example - Bollinger Bands and RSI

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Pages 6 (1506 words)
Bollinger Bands result from the technique of using moving averages with two trading bands in order to track a stock's volatility. Unlike using a percentage calculation from a normal moving average, Bollinger Bands simply add and subtract a standard deviation calculation…

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Traders know that when the stock price continually touches the upperBollinger Band, the price is thought to beoverbought and conversely, when they continually touch the lower band, the prices are thought to be oversold (Investopedia).
The purpose of an RSI is to compare the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI is best used as a valuable complement to other indices, for in and of itself it is susceptible to the fact that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. Different RSI settings can allow traders to get more accurate market readings about different strategies that they might wish to use. "Swing traders" might want to set the measured period at 15 days, while those buying to hold for longer times might want to make it equal to 30 or even 50 days. Some traders havefound that the RSI works best when it is compared to short-termmoving-average crossovers. Using a 10-day moving average with a 25-day moving average, a trader may find that the crossovers indicating a shift in direction will occur very close to the times when the RSI chart is showing either distinct overbought or oversold readings. Simply put, the RSI, sooner than almost anything else,indicates an upcoming reversal of a trend, either up or down (Investopedia).
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