Table of Contents

How Do I Create a Trading Strategy With Bollinger Bands® and the RSI?

By

Updated December 04, 2024

Reviewed by

Bollinger Bands are one of the most common volatility indicators used in technical stock market analysis. It's very common to combine Bollinger Bands with another famous indicator, the Relative Strength Index (RSI), to help confirm a trend's relativ꧒e strength.

Key Takeaways

Bollinger Bands are common volatility indicators used in technical stock market analysis.
They're often combined with the Relative Strength Index (RSI) to help confirm a trend's relative strength.
The RSI is a momentum indicator that compares the number of days a security closes up versus the number of days it closes down over a given period.
The RSI supports or contradicts potential price trends when it's used in tandem with Bollinger Bands.

How Bollinger Bands Work

Bollinger Bands plot three separate lines on a price chart. The outer two represent a two-standard deviation range from a center line that's calculated using a simple moving average. The standard deviations widen or narrow dynamically based on the security's trading range so 澳洲幸运5官方开奖结果体彩网:Bollinger Bands can be a very flexible and adaptable tool.

How the Relative Strength Index (RSI) Works

The RSI is a momentum indicator that compares the number of days that a security closes up versus the days it closes down over a specified period. These values are then plotted on a range from zero to 100. Overbought securities are typically expected when the RSI returns a value over 70. Oversold securities are expected when the value is under 30.

When RSI and Bollinger Bands Are Combined

A trader could interpret that the security is overbought if a stock price reaches the upper band of a Bollinger Band price channel and the RSI reads 70+ at the same time, They could then sell the stock, buy a put, or sell 澳洲幸运5官方开奖结果体彩网:covered calls.

Important

The RSI acts to either support or dispel possible price trends when it's combined with Bollinger Bands.

An Example

Suppose the price chart shows that trading is reaching the lower Bollinger Band and the RSI isn't under 30. The RSI is telling the investor that the security may not be oversold as the Bollinger Bands seem to indicate. The trader wouldn't immediately enter buy calls or purchase extra stock because the downtrend could continue. The trader may even consider a sell if the RSI is high enough.

What Is a Covered Call?

A covered call involves buying a stock and then selling calls on the shares. As with all investing, the viability of this tactic depends heavily on movements in stock price.

What Is a Momentum Indicator?

Momentum indicators gauge the speed of price changes. They're like crystal balls that can potentially indicate whether and when prices will increase or decrease.

The RSI is just one of these tools. There's also the Moving Average Convergence Divergence (MACD), the Average True Range (ATR), and the Commodity Channel Index (CCI). The right one for you can depend on what you're looking for and your risk tolerance.

What Is a Good RSI Value?

A good RSI will typically be between 30 and 70. A value above 70 indicates that the security is overbought. A value below 30 indicates that it's oversold. "Over" is the key term here. The RSI can hit 90 in a bull market or drop to as low as 10 in a bear market. These values can remain steady for a while during strong trends.

The Bottom Line

Bollinger Bands are commonly used in tandem with the Relative Strength Index (RSI) to confirm the strength of a market trend. The RSI is a momentum indicator that’s based on the nuꦅmber♈ of days a security closes up versus the number of days it closes down. These tools can help confirm or dispel potential trends when they’re used together.

Numerous other options are available, however, and you can use more than one tool to get a firm handle on the market before you commit.

Disclosure: Investopedia does not provide investment advice; investors should consider their risk tolerance and investment objectives before making investment decisions.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Bollinger Bands. ""
Nison, Steve. "." New York Institute of Finance, 2001, pp. 226-227.
Fidelity Investments. "."
Timothy Sykes. "."
Fidelity Investments. "."

澳洲幸运5官方开奖结果体彩网