Trading Strategy Combining the RSI and Bollinger Bands
Bollinger Bands: Bollinger Bands indicator consists of three bands, which 85% of the time retains price within their boundaries: - Simple moving average (SMA) in the middle (with default value of 20) - Lower band - SMA minus 2 standard deviations - Upper band - SMA plus 2 standard deviations The default value for Bollinger Bands in Stock is (20,2). When the market becomes more volatile, the bands will correspond by widening and moving away from the middle line. When the market slows down and becomes less volatile, the bands will move closer together. Relative Strength Index: Standard period settings for RSI are 14 periods, which can be applied to any time frame. RSI indicator compares the average of up and down closes for a specific period of time. RSI indicator is often referred as an overbought/oversold indicator; however, this is not exactly accurate. RSI doesn't provide Buy/Sell signals upon reaching oversold/overbought areas, there are certain rules, which help to identify the right timing for entries and exits. Required indicators: • Bollinger Bands: 20 • Relative Strength Index: 14 For this strategy we will be examining the 30-minute time frames of NIFTY chart. The indicator we will be using is the Relative Strength Index (RSI) (with its period set to 14, overbought level – 70, oversold level – 30), while we will also apply the Bollinger Band (with its default settings). We mark the 50.00 level of the RSI and use it in order to determine whether the market is trending up or down. On the 30 minute chart of NIFTY, if the RSI reading is above 50.00, then the market is in an uptrend and a reading below 50.00 indicates a downtrend. In order to make an entry, a trader will need to use the 30-minute time frame. Buy Signal During a bull trend in case a candle closes below the lower band of the Bollinger and then the next candle closes above the lower band, this is a setup for a long entry. The protective stop needs to be placed on the low price of the candle that closed below the lower band. Sell Signal During a bear trend in case a candle closes above the upper band of the Bollinger and then the next candle closes below the upper band, this is a setup for a short entry. The protective stop needs to be placed on the high price of the candle that closed above the upper band.