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Introduction to Relative Volume Indicator BB/KC Squeeze: A Powerful Indicator for Trading Range Breakouts
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RSI with Bollinger Bands

Introduction to RSI with Bollinger Bands

RSI with Bollinger Bands is an innovative technical indicator combining two popular tools in the world of trading and investing: the Relative Strength Index (RSI) and Bollinger Bands. The “RSI with Volatility Bands” indicator provides traders a unique way to identify potential market extremes by wrapping the RSI with Bollinger Bands.

Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a widely-used momentum oscillator that measures the speed and change of price movements. Developed by J. Welles Wilder in 1978, RSI provides traders with a simple way to identify overbought or oversold conditions in a market.

RSI with Bollinger bands

How RSI is calculated

RSI is calculated using the following formula:

RSI = 100 - (100 / (1 + RS))

Where RS (Relative Strength) is the average gain divided by the average loss over a specified period, usually 14 days, RSI values range from 0 to 100, with higher values indicating stronger upward momentum and lower values indicating stronger downward momentum.

Interpreting RSI signals

RSI values above 70 are typically considered overbought, suggesting that the market may be due for a price correction or reversal. Conversely, RSI values below 30 are considered oversold, indicating that the market may be poised for a price increase. Traders often use RSI to identify potential entry and exit points based on these overbought and oversold levels.

Bollinger Bands

Bollinger Bands, developed by John Bollinger in the 1980s, are a set of volatility bands placed above and below a moving average. These bands are designed to capture the majority of price action and can be used to identify potential market reversals and price breakouts.

How Bollinger Bands are calculated

Bollinger Bands consist of three lines:

  1. Middle Band: A simple moving average, typically over 20 periods.
  2. Upper Band: The middle band plus two standard deviations of the price.
  3. Lower Band: The middle band minus two standard deviations of the price.

Interpreting Bollinger Band signals

When the market is quiet, the bands contract, indicating low volatility. Conversely, the bands expand when the market is active, signifying high volatility. Traders can use Bollinger Bands to identify potential breakouts, reversals, or trends by monitoring the bands’ behavior and price action.

Example scanners and strategies that use RSI with Bollinger Bands

The Relative Strength Index can be used in both Scanning the market and Testing Strategies. To see how exactly it can be used in these ways, we provide the following samples. The scanner searches the market for stocks using this indicator, and the strategy tests buying and selling rules built around this indicator.

"RSI/Bollinger #NT" scanner by ELLEN ROHRBACHER
charts.trendspider.com
“RSI/Bollinger #NT” scanner by ELLEN ROHRBACHER
"RSI/Bollinger Long Strategy #NT" strategy by ELLEN ROHRBACHER
charts.trendspider.com
“RSI/Bollinger Long Strategy #NT” strategy by ELLEN ROHRBACHER

RSI with Bollinger Bands Indicator

The “RSI with Volatility Bands” indicator combines the benefits of RSI and Bollinger Bands to provide a powerful tool for identifying potential market extremes. By wrapping the RSI with Bollinger Bands, traders can better understand the current market environment and make more informed decisions.

How to use RSI with Bollinger Bands

To use the RSI with Bollinger Bands indicator, traders should first look for situations where the RSI line breaches the upper or lower Bollinger Bands. When the RSI exceeds the upper band, it signals a potential overbought condition, indicating that a price correction or reversal may be imminent. Conversely, when the RSI drops below the lower band, it suggests an oversold condition, pointing to a potential price increase.

Additionally, traders can monitor the width of the Bollinger Bands around the RSI. Narrow bands indicate low volatility, while wide bands signify high volatility. By observing the bands’ behavior, traders can identify market consolidation periods and potential breakouts or reversals.

Advantages of using RSI with Bollinger Bands

The RSI with Bollinger Bands indicator offers several advantages to traders:

  1. Enhanced market insight: By combining RSI and Bollinger Bands, traders can better understand the current market environment, helping them make more informed decisions.
  2. Improved signal accuracy: By incorporating Bollinger Bands, the RSI with Volatility Bands indicator can help traders identify more accurate overbought and oversold signals.
  3. Versatility: The RSI with Bollinger Bands indicator can be applied to various markets, including stocks, forex, commodities, and cryptocurrencies.

Tips for incorporating RSI with Bollinger Bands into your trading strategy

  1. Use the RSI with Bollinger Bands indicator and other technical analysis tools to confirm potential trade signals.
  2. Set appropriate stop-loss and take-profit levels to manage risk and protect your trading capital.
  3. Test the indicator on historical data before incorporating it into your live trading strategy to ensure its effectiveness.
  4. Remain patient and disciplined, waiting for the RSI with Bollinger Bands to provide clear signals before executing trades.

Limitations and considerations

As with any technical indicator, the RSI with Bollinger Bands has its limitations:

  1. False signals: The indicator may generate false signals, leading to potential losses. To mitigate this risk, use the indicator with other technical analysis tools.
  2. Lagging nature: Both RSI and Bollinger Bands are lagging indicators, meaning they rely on historical data to generate signals. As a result, they may not always accurately predict future price movements.

The Bottom Line

The RSI with Bollinger Bands indicator combines the strengths of two popular technical analysis tools to provide traders with a powerful means of identifying potential market extremes. By incorporating this indicator into your trading strategy, you can better understand the current market environment and make more informed decisions. However, it is essential to use the RSI with Bollinger Bands indicator alongside other technical analysis tools and maintain a disciplined approach to risk management to achieve long-term trading success.

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Introduction to Relative Volume Indicator BB/KC Squeeze: A Powerful Indicator for Trading Range Breakouts