(6) Advanced Use Of Bollinger Bands With RSI Indicator
It is one of the most unbeatable tips for day trading with Bollinger bands. Like every indicator, Bollinger Bands® do have some basic limitations. Traders need to take this in account when analyzing a financial instrument.
One can use an additional indicator such as Relative Strength Index (RSI) along with Bollinger bands to get additional buy & sell signals. Here are some basic guidelines of using Bollinger bands with RSI:
(a) When RSI is approaching extreme high levels i.e. around 100 & is touching the high part of the upper band then it could be an overbought condition. Therefore, RSI line could pull back sharply from the band.
(b) When RSI is approaching extreme low levels i.e. around 0 & is touching the low part of the lower band then it could be an oversold condition. Therefore, RSI line could again pull back sharply from the band.
(c) Bollinger band analysis states that at extreme highs, a failure of RSI to touch the upper band on second try typically generates a sell signal. This chart pattern is quite similar to double top formation.
(d) At extreme lows, a failure of RSI to touch the lower band on second try typically generates a buy signal. This chart pattern is quite similar to double bottom formation.
Thus, intraday traders can use Bollinger bands in combination with RSI to make profitable entries & exits in a given financial instrument.
(7) Add More Simple Moving Average (SMA) To Analyze Strength Of Prevailing Trend
It is one of the most unique tips for day trading with Bollinger bands. In a strong trend, prices often start riding the Bollinger bands. If the trend in an uptrend then price will ride the upper band. But, if the trend is a downtrend then prices will ride the lower band.
You should always trade as per the prevailing trend. However, in order to find the right point to exit your positions, you should add more simple moving average (SMA) i.e. 50-period, and 200-period to the tecnical chart.
As a general rule, 50-period breakout will be a strong indication of a longer breakout as compared to breakout of 20-period or 50-period alone.
For example, if these bands are overlapping then the prevailing trend will be much stronger then when the bands are far away from each other. You should never try to make positions against the trend as long as bands are overlapping.
Once the 200-period SMA starts moving away from current price then it indicates that strength of prevailing trend is diminishing. You should book profit in such circumstance.
If uptrend is diminishing then you can make short positions. On the other hand, if downtrend is diminishing then you can make long positions.
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