Technical Analysis Using Bollinger Bands & RSI
Bollinger Bands
Developed by John Bollinger, Bollinger Bands allows users to compare volatility and relative price levels over a period
time. Bollinger Bands are envelopes which surround the price bars on a chart. They are plotted two standard deviations
away from a simple moving average. Because standard deviation is a measure of volatility, the bands adjust themselves
to ongoing market conditions. They widen during volatile market periods and contract during less volatile periods.
Bollinger Bands are, essentially, moving standard deviation bands.
Bollinger Bands are sometimes displayed with a third center line. This is the simple moving average line. Mr. Bollinger
recommends using a 10 day moving average for short term trading, 20 days for intermediate term trading, and 50 days for
longer term trading.
The standard deviation value may be varied. Increase the value from 2 standard deviations to 2-1/2 standard deviations
away from the moving average when using a 50 day moving average. Conversely, lower the value from 2 to 1-1/2
standard deviations away from the moving average when using a 10 day moving average.
Bollinger Bands do not generate buy and sell signals alone. They should be used with another indicator such as Relative
Strength (RSI). This is because when price touches one of the bands, it could indicate one of two things. It could indicate
a continuation of the trend; or it could indicate a reaction the other way. By themselves they do not tell us when to buy and
sell.
However, when combined with RSI, they become powerful. RSI is an excellent indicator with respect to overbought and
oversold conditions. When price touches the upper band, and RSI is below 70, we have an indication that the trend will
continue. When price touches the lower band, and RSI is above 30, we have an indication that the trend will continue.
If we run into a situation where price touches the upper band and RSI is above 70 approaching 80 we have an