When combined, the indicators let you see the overbought and oversold conditions as well as where to set your entry and exit points. As a volatility indicator, the Bollinger Bands can help you visualize the changes in a security’s price as a standard deviation; while the RSI excels at charting momentum as a line that moves from 0 to 100.
A reading below 30 on the RSI is a sign of an oversold market, while readings 70 and above indicate overbought conditions. In both cases, it signals that there could be an impending reversal in the opposite direction.
Combining Bollinger Bands and the Relative Strength Index (RSI)
As seen in the above graph, combining the Bollinger Bands and the relative strength index can give way to a unique trading strategy.
By looking at the RSI, we can see that bitcoin is currently in the oversold market as the line is below 30 on the minutely bars. Also, price is below the middle Bollinger Band, which is the moving average of the indicator.
In this scenario, we’d be best to wait to see if price will make a reversal to the upside before going long, otherwise, can go short on bitcoin if we anticipate that the sell-off will continue in favor of the bears.
For trading with the Bollinger Bands, we want to see price in a general uptrend and above the moving average. Once price nears the upper band, we can then sell at a profit. For this strategy to work we also need to take some clues from the RSI.
As the relative strength index measures momentum and the importance of price movements, we would want the RSI to be above its centre line of 50, which indicates that upside momentum is increasing. For a shorting strategy, we would want to see the RSI below 50, which means that downside momentum is increasing.
A free comprehensive guide on how you can incorporate Bollinger Bands as part of your trading strategy can be read here.