In the world of forex trading, these two indicators are often used as a tool for mapping and analyzing the market before trading. As in general, Bollinger Bands (BB) is indicator that assess the market whether it is calm or volatile, or in upward bias, downward or stable. BB itself is often used to provide clues to the possibility of prices moving from current levels to the furthest extreme levels possible.
While the Relative Strength Index (RSI) is an indicator that measures market strength by giving the numbers 0-100. 0 is stated as the market is bearish or is in a down period while 100 is stated as a market is being bullish or is in a period of going up. Figures on the RSI also indicate whether a currency pair is oversold or overbought. Oversold when the index shows below 30 and overbought is indicated when the index number is above 70.
What if the two indicators are combined?
It is not uncommon and unusual for both of them to be combined, it can even be a good analytical material for trading. These two indicators can complement each other, especially when the price of a currency pair moves at its extreme, both extreme up and extreme down. Classified as oscillator indicators, both are leading indicators that can predict the possible direction and motion of a currency pair.
See the following picture.
Display of Bollinger Bands and RSI indicators on the MT4 chart
The analysis used for trading by using these two indicators is quite easy. As seen in the picture, the two indicators support each other in terms of showing the signal and direction of movement of the currency pair. When the currency pair rises, the RSI will also go up and pass the number 70. Conversely, when the currency pair goes down, the RSI also drops below 30.
Meanwhile, from the BB side it is seen that BB acts as a signpost, whether it is still in trend or sideways. BB that continues to go up or down the slope, shows that the trend is happening. While BB is flat, indicating that the trend is absent and prices only move within a certain range. For those who trade for the short term, this is appropriate for the execution of alternating buy and sell orders.
Read also : Trading Tips By Using Indicators Effectively
See the following picture.
Entry on Chart Using BB and RSI
- Entry can be done when both indicators show the same position. As in the example image above, the buy entry is done when the RSI is below 30 and the candlestick is also pointing down and in contact with the lower limit of the BB.
- While exit or profit taking can be done when RSI is above 70 and the candlestick is also at the upper limit of BB. Thus, trading using these two indicators is quite easy.
- For short positions, just pay attention to the opposite. Do sell orders if the RSI is above 70 and directed down, at the same time the candlestick also starts to come out of the upper limit of BB.
The exit of this trading strategy is when the RSI drops below the value of 30 along with the candlestick going down and touching the lower limit of the BB line.
- At certain times, the price may turn around before the RSI touches the number 30 or 70 or when the candlestick has not touched one of the upper or lower boundary lines. If this happens, you should wait and don’t trade until it is clear that the candlestick towards the BB or RSI line has touched 70 or 30. This is to avoid false signals.
- For Stop Loss and Target Profit, it can be calculated in many ways. Stop loss can be calculated by placing SL at the extremes of the RSI or BB. For example from the previous picture, SL can be installed by placing 50 pips from the entry downwards. Or if a sell position, SL mounted 50 pips from the position of 50 pips from the entry to the top. This is usually done to avoid prices continuing to move in one direction and trending.
What should be considered?
Keep in mind that a system using these two indicators does not always guarantee profit and success. Therefore the loss limit must still be there and installed at every time an entry is made ie Stop Loss or SL. Indicators are only tools to see what is likely to happen, not tools to see the future that will happen.
Always obey the rules when making transactions, because most traders make the mistake of breaking the rules they made themselves. This rule includes not opening new positions if the existing ones are not yet regarding SL or TP. Do not get carried away quickly when experiencing losses or when making a profit. Keep doing the analysis with good and focused mind to achieve forex trading system that are consistent profits.