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Bollinger Bands and RSI - Essay Example

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Bollinger Bands and RSI

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).
In our analysis we have made th...
We have used this strategy so that the "noise" created by volatility indicated by the Bollinger Bands gets reduced by the "high pass filter" of the RSI reading. Simply put, we are looking at once at an individual stock's performance and at that stock's industry's performance. We believe this is an astute way of reducing undue risk by providing us with a more accurate and complete marketplace picture so that we are less likely to be tricked by anomalous circumstances surrounding a stock's temporary pricing trend.

Our Trading Signals:

1. Open Long (L): When the price breaks the bottom band of the Bollinger chart, this is indication to go long, but if and only if the bottom band of the RSI is also broken.

2. Close Long (C): Signaled when the price breaks the top Bollinger band, and RSI at once breaks its top band.

3. Open Short (S): When the price breaks the top band of the Bollinger chart, this is an indication to go short, but if and only if the top band of the RSI is also broken.

4. Close Short (C): Signaled when the price breaks the bottom Bollinger Band, and RSI at once breaks the top band.

5. Ignore Indications to trade (X): Where the trigger indicator is satisfied i.e. a Bollinger band is broken, but is not supported by RSI. (XB: Top BB broken, RSI not) (XT: Bottom BB broken, RSI not) (XR: Repeated Trade*).

* No repeated trades are permitted in our analysis. I.E., if an open long signal is given and then would be repeated the next day, then the second signal is ignored.

We have taken an aggressive approach in our analysis. We closed short and opened long early on. This was a result simply of following the strategy that we had laid out; we were not attempting to be overly aggressive nor overly ...Show more


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…
Author : haileeparisian
Bollinger Bands and RSI
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