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This trading strategy uses both the Bollinger Bands and the RSi indicator to simply find a price
bounce that occurs during the main trend.
They were created by John Bollinger in the early 1980s. The purpose of these bands are to give
you a relative definition of high and low. So in theory, the prices are high at the upper band and
then are low at the lower band. Bollinger bands include three different lines. The upper, middle,
and lower band. The middle band basically serves as a base for both the upper and lower.
They are mainly used when determining when there is overbought or oversold levels. Selling
when the price touches the upper band and buying when the price touches the lower band.
The spacing in between the lower, upper, and the middle band is determined by volatility. The
middle band consists of a 20 period moving average, while the upper and lower are two
standard deviations below and above the moving average in the middle. All standard deviation
means is that it is a statistical measure that offers a great reflection of the price volatility.
When you see the band widen that simply means that there is volatility at that time. When the
price moves very little, the band will narrow which means that there is little volatility.
Before we start looking at the rules of the strategy, lets take a look at what bollinger bands will
look like on a chart if you have never used this type of indicator in the past:
After examining the picture, it may seem wise to buy every time the price hits the lower band or
sell every time the price hits the upper band. This can technically work, but is a risky way of
trading using the Bollinger Bands. Sometimes strong trends will ride these bands and end up
stopping out many unfortunate traders who used that method. This is why we are using the RSI
indicator to help confirm and trade the bounce of a upper or a lower band.
The RSI indicator is used in this strategy to see how the currency is weakening or
strengthening.
These indicators should come standard on your trading platform. There is no need to adjust
these, as we will use the default settings.
The only element would suggest performing before you start, is to draw a horizontal line on the
50.00 level in the RSI indicator. You will find out exactly why soon.
To see an example of a SELL trade, there will be one listed for you in the Example trades.
**If it is any more than 5 pips away then I would not consider this validated, and I would
wait for it to come closer to the bottom/top band.
As you can see in the example that price came all the way back down, from the uptrend, and
touched the bottom band.
Once the price touches the bottom or top band, look a the RSI indicator for confirmation.
The price hit the bollinger band, the RSI (when the price touches the bottom band) needs to be
in between 50 and 30. If it is not here and lets just say it was at the 80 mark, then that would
not be something you would be interested in trading.
You want to see the RSI go up, in this case, in the direction of the trade. Remember that it
should be in between the 30-50 mark. (In a sell trade the RSI would need to be in between the
50-70 mark and going downward.)
Rule #4: After price hits lower band, and RSI is going upwards, make
entry when...
You can make an entry when you either see a STRONG BULLISH candle to the upside, you
see consecutive reversal candles to the upside, or you find a bullish pattern forming. You need
to see that the trend is moving upwards, in this case, before you enter a trade.
If the candlesticks are moving to a point where it is making a new low, this would not be a good
time to enter a trade. However, once the candles fail to make a new a low watch to see if it
forms a bullish formation.
In this example I bumped down to a one hour chart to make an entry. This is perfectly fine to do.
This could give you a more accurate place to make an entry point. As I said, the 4 hour and 1
time frames are the preferred time frames for this strategy. Yes there is less of an opportunity
for a trade, but the signals are very strong when you are in a higher time frame.
Conclusion
Something else you can consider is when the price touches the middle band you can make a
second entry to press your winners. This can potentially give you double the profit. With this
strategy we only use the one trade that we initially make, but if your rules allow you to make
multiple trades at a time with the same currency pair, then adding a second position at the
middle line may be something you would want to consider.
Rule #3: Once the Price hits the upper band, look at the RSI indicator
and it should be between 50-70 and falling.
Rule #4: After price hits upper band, and RSI is going down, make
entry when you see a STRONG BEARISH candle to the downside, you
Rule #3: Once the Price hits the lower band, look at the RSI indicator
and it should be between 30-50 and rising.
Rule #3: Once the Price hits the upper band, look at the RSI indicator
and it should be between 50-70 and going downward.