Bollinger Band + RSI Trading Strategy That Actually Works

Summary

This video introduces a Bollinger Bands and RSI-based trading strategy with a high success rate. The presenter guides viewers on setting up Bollinger Bands with a 30-period moving average and 2 standard deviations, and RSI with a 13-period length and threshold values of 70 and 30. The strategy capitalizes on mean reversion, entering trades when price extremes coincide with RSI extremes. A crucial tip is to avoid trading during sideways market movements, and the video also covers the concept of divergence for more accurate trade entries. The presenter encourages viewers to like the video and check out another video on a MACD strategy with an impressive win rate.

Takeaways

• 📈 The video introduces a trading strategy using Bollinger Bands and RSI with a high success rate when used correctly.
• 🛠️ To set up Bollinger Bands, change the length to 30 and the standard deviation to 2, and customize the appearance as desired.
• 🔢 The central line of the Bollinger Bands is a moving average calculated over the specified length of 30 candlesticks.
• 📉 The lower and upper lines of the Bollinger Bands represent standard deviations, indicating price volatility.
• 🔄 RSI (Relative Strength Index) is added to the strategy, with settings adjusted to an upper threshold of 70 and a lower threshold of 30, and a length of 13.
• ⚠️ RSI helps identify overbought (above 70) and oversold (below 30) conditions in the market.
• 🔄 The strategy is based on the concept of mean reversion, expecting prices to return to the moving average after significant movements.
• 🚫 To avoid false signals, only enter trades when the price touches the Bollinger Bands and RSI hits extreme values (below 25 for long trades, above 75 for short trades).
• 📊 The strategy may not work well in sideways markets, where prices do not exhibit clear trends.
• 📉 In sideways markets, be cautious of trades when Bollinger Bands are narrow and RSI is stable, as significant price movements may follow.
• 🔄 Divergence occurs when price makes a lower low but RSI makes a higher low, signaling a potential reversal and a good entry point for a trade.
• 👍 The presenter encourages liking the video and watching another video on a MACD strategy with an 86% win rate.

Q & A

What is the primary focus of the video?

The video focuses on explaining a trading strategy that uses Bollinger Bands and RSI (Relative Strength Index) for identifying support and resistance levels and making profitable trades.

What is the default setting for Bollinger Bands in TradingView, and how does the video suggest changing it for this strategy?

The default setting for Bollinger Bands in TradingView is a length of 20 with a standard deviation of 2. The video suggests changing the length to 30 and keeping the standard deviation at 2 for this specific strategy.

Why is the RSI indicator important in this trading strategy?

The RSI indicator is important because it helps determine if a security is overbought or oversold, which is crucial for identifying potential entry and exit points in the trading strategy.

What are the modified settings for the RSI in this strategy?

In this strategy, the upper band of the RSI should be set to 70, the lower band to 30, and the length to 13.

What is the concept of mean reversion, and how does it apply to this trading strategy?

Mean reversion is the idea that prices and returns eventually move back towards the average or mean. In this strategy, it means that after a significant price movement, the price is expected to return to the moving average, which is the center line of the Bollinger Bands.

How does the strategy suggest entering a long trade?

A long trade should be entered when the price moves below the lower Bollinger Band and the RSI goes below 25, indicating an oversold condition.

What conditions should be met to enter a short trade according to the strategy?

A short trade should be entered when the price moves above the upper Bollinger Band and the RSI goes above 75, indicating an overbought condition.

What is the main issue with using this strategy in a sideways market?

In a sideways market, where prices are not trending but rather moving in a narrow range, the strategy may not work well as it is harder to predict price movements, leading to potential losses.

What is divergence, and how does it relate to the trading strategy?

Divergence occurs when the price makes a new low (or high) but the RSI makes a higher low (or lower high), indicating a potential reversal in the trend. In the strategy, this is a good sign to enter a trade, especially if the RSI was previously below 25.

What is the video's suggestion for avoiding losses when the market is moving sideways?

The video suggests not trading during sideways markets when the Bollinger Bands are close together and the RSI is not hitting extreme values, as this can indicate an upcoming strong price movement in one direction.

What additional resource does the video recommend for viewers interested in trading strategies?

The video recommends watching another video on a MACD strategy that claims to have an 86% win rate for trading.

Outlines

00:00

📈 Bollinger Bands and RSI Trading Strategy

This paragraph introduces a high-success-rate trading strategy using Bollinger Bands and RSI. The presenter explains how to set up Bollinger Bands on a trading platform, changing default settings to a 30-period length with a standard deviation of 2, and customizing the appearance. The central concept is the moving average represented by the center line of the Bollinger Bands, with the upper and lower lines indicating standard deviations. The RSI indicator is then added and adjusted to a 13-period length with overbought and oversold thresholds set at 70 and 30, respectively. The strategy revolves around mean reversion, where after significant price movement, the price is expected to return to the average. Entry points for trades are identified when the price crosses the Bollinger Bands and the RSI hits extreme values, with additional criteria to avoid false signals.

05:01

🚫 Avoiding Sideways Market Pitfalls with Divergence

The second paragraph addresses the limitations of the strategy in sideways markets, where predicting price movements is more challenging. The presenter warns against trading during these periods, as it can lead to significant losses, especially when the Bollinger Bands are 'skinny,' indicating minimal price movement and RSI stability. An alternative strategy is introduced, focusing on divergence, where the price makes a lower low but the RSI makes a higher low, signaling a potential reversal and a good entry point for a trade. The importance of recognizing these patterns is emphasized to avoid losses and capitalize on profitable opportunities. The paragraph concludes with a call to action for viewers to like the video and explore other trading strategies presented in other videos by the same creator.

Keywords

💡Bollinger Bands

Bollinger Bands are a technical analysis tool invented by John Bollinger that consist of a set of lines plotted two standard deviations (positively and negatively) away from a simple moving average of a security's price. In the video, they are used to identify potential overbought or oversold conditions and to find support and resistance levels, which are crucial for the trading strategy discussed.

💡RSI (Relative Strength Index)

The RSI is a momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100. It is used to identify overbought or oversold conditions of a stock. In the video, RSI is combined with Bollinger Bands to improve the accuracy of trading signals by confirming extreme conditions before entering trades.

💡Mean Reversion

Mean reversion is a financial theory that suggests that asset prices and historical returns will revert to the long-term mean or average trend. The video describes this concept as the basis for the trading strategy, where prices are expected to return to the moving average after significant deviations, as indicated by the Bollinger Bands.

💡Overbought

An overbought condition occurs when an asset's price rises sharply and is considered to be too high based on its recent trend. In the script, the RSI is used to identify when a security is overbought, indicated by the RSI line being above 70, which may suggest a potential price reversal.

💡Oversold

Conversely, an oversold condition happens when an asset's price falls sharply and is considered to be too low based on its recent trend. The video mentions that if the RSI is below 30, the security is considered oversold, signaling a potential buying opportunity.

💡Divergence

Divergence in technical analysis refers to a situation where the price of a security is moving in the opposite direction of an indicator, such as the RSI. In the video, the presenter explains that when the price makes a lower low but the RSI makes a higher low, it is a bullish divergence, indicating a potential upward price movement.

💡Support and Resistance Levels

Support and resistance levels are price points at which an asset's price tends to stop falling and start rising (support) or stop rising and start falling (resistance). The Bollinger Bands help identify these levels in the video, which are critical for determining entry and exit points in trades.

💡Trading Strategy

A trading strategy in the context of the video refers to a specific approach to trading that uses a combination of Bollinger Bands and RSI to make informed decisions about entering and exiting trades. The strategy aims to capitalize on mean reversion and extreme conditions indicated by the indicators.

💡False Signals

False signals are trading signals that do not result in profitable trades. In the script, the presenter discusses how relying solely on price movements relative to Bollinger Bands can lead to many false signals, hence the addition of RSI to filter out these false signals and improve the strategy's success rate.

💡Sideways Market

A sideways market, also known as a range-bound market, is one where the price of a security moves in a relatively narrow range and does not show a clear upward or downward trend. The video warns that trading strategies like the one discussed may not perform well in sideways markets, as they can lead to losses if trades are entered without considering the market's direction.

💡Momentum

Momentum in trading refers to the rate at which the price of a security is increasing or decreasing. The RSI is a momentum indicator used in the video's strategy to measure the strength of recent price movements. Understanding momentum is key to identifying potential turning points in the price trend.

Highlights

Introduction to a highly effective trading strategy using Bollinger Bands and RSI.

Bollinger Bands as a tool for identifying support and resistance levels.

Setting up Bollinger Bands with a 30-period length and 2 standard deviation.

Customizing Bollinger Bands appearance for better visualization.

Explanation of Bollinger Bands' center line as a moving average.

Adding RSI to the trading chart for additional analysis.

RSI settings adjustment to a 13-period length with overbought and oversold thresholds at 70 and 30.

RSI as an indicator for overbought or oversold conditions in the market.

Combining Bollinger Bands and RSI for profitable trading opportunities.

Mean reversion concept as the foundation for the trading strategy.

Trading strategy entry points based on price movements relative to Bollinger Bands and RSI values.

Avoiding false signals by requiring RSI to hit extreme values before entering a trade.

Example of a profitable long trade entry when price and RSI conditions align.

The importance of avoiding trades during sideways market movements.

Identifying market conditions prone to large price movements using Bollinger Bands' width and RSI behavior.

Divergence as a powerful signal for trade entry, especially when RSI makes a higher low while price makes a lower low.

A call to action for viewers to like the video and explore additional trading strategies.

A teaser for another video featuring an 86% win rate MACD strategy.

Transcripts

Bollinger Bands In this video, I m going to show you a trading

strategy that works so good I just have to tell you guys. And it involves using Bollinger

Bands and RS. It s simple, easy to use, and has a pretty high success rate if you use

it correctly. Well enough talk, let s get straight to it.

The first step for this strategy is setting up the Bollinger bands. If you ve never used

Bollinger Bands before, your lucky you clicked this video, because this indicator is absolutely

incredible and is great way to find support and resistance levels.

So the first thing we want to do is to go to trading view or whatever trading chart

platform you use, click the indicators tab, and type in Bollinger Bands .

Now, the default settings trading view will give you, are nice, but we want to change

them for this specific strategy. First thing you want to do is go to the length

section and change this value to 30, make sure the standard deviation is set to 2.

Then I m also going to remove the background of the indicator, and change the lines to

red. This is all personal preference, you can do whatever you prefer here.

So if you didn t know, this is how Bollinger bands work. The center line, is a moving average.

So whatever amount the length is, this indicator is going back that many candle sticks and

finding the average between them. So for this strategy we are going back 30 candlesticks.

The lower and upper lines are standard deviation lines.

Alright we got the Bollinger Bands setup, now let s add the RSI.

To do this, just go to your indicators tab, type in RSI and then click this top one that

says Relative strength index Now that we have RSI added let s modify the

settings a bit. Make sure that upper band is set to 70, and your lower band is set to

30. Then this length is probably going to be set

to 14, make sure to change that to 13 for this strategy.

If you haven t used RSI before it s a great indicator to tell you if a certain security

is being overbought or oversold. If the line is above the 70 value, its being

overbought, if the line is below the 30 value, its being oversold.

Now it s time to pair these 2 indicators together and get some profitable trades going.

Make sure you watch the rest this video, because im going to explain a crucial tip to make

this strategy working just okay, to turn into a money making machine.

So there are 2 different strategies you can choose from when using these indicators. Both

of these strategies are built around the concept called mean reversion.

What s mean reversion you my ask? Well, mean refers to the word average, and the word reversion

means returning to So to put it simply, the phrase mean reversion

just means returning to the average. Which is exactly what we are going to be shooting

for with this strategy. So as an example, in most cases if there is

extreme price movement in one direction whether its up or down, we can pretty much predict

after that big price movement, the price will return back to the average (the moving average

right here). So if the price goes above the upper Bollinger

band, we want to enter a short trade. If the prices goes below the bottom Bollinger band,

we want to enter a long trade. Simple enough right? Well, if you did this

by itself, odds are it wouldn t work to good. That s why we added the RSI earlier.

So as you can see in this example the price went above or below the Bollinger bands many

times giving lots of false signals. So if you went in every time here, you probably

lost money. To solve this issue we are going to add one

more requirement. You can only go in if the RSI hits an extreme value.

Meaning, we can only enter a long trade if the price moves below the lower Bollinger

band and the rsi goes below the value of 25. For shorting, we will only enter a trade if

the price goes above the upper Bollinger band, and the rsi goes over the value of 75.

So as an example here we are looing at apple and the price starts going below the bottom

Bollinger band here, but at this point in time the RSI is still not where we want it

to be. So we wait it out a bit until the line goes below 25. which it proceeds to go down

all the way to 20, we enter a long trade at this point, and the price returns to the average

just like we predicted it would. Now there is some crucial information you

need to know about this strategy or else it simply just wont work. This next tip im about

to tell you is the difference between making this strategy profitable or making a money

loser. Where this strategy has its faults is when

the market is moving sideways. For almost all trading strategies when the markets is

moving sideways it s a lot harder to predict. So as example here, the price goes below the

lower Bollinger band, and the RSI is below 25, but the price just keeps on dropping.

So if you entered here, you would have an absolute massive loss.

So now im going to show you a nice little trick, so you know before hand before these

huge price movement even happen. So in this example notice how skinny the Bollinger

bands are at this point in time, they are very close together, and there is barely any

price movement, and the market is moving sideways. You can also see that the RSI is being very

tame and staying in between the purple rectangle and not going above or below the major points

we made before. This alone, should immediately raise a huge red flag.

Most times when the market is like this for a while, when the price does break in a certain

direction, it goes in that direction with huge amounts of momentum.

So in these types of examples, you never want to trade trying to catch a falling knife when

the price starts to act like this. Let me show you another strategy we can use,

to help solve this, that works like absolute magic.

Here you can see the price starts to drop to the lower Bollinger band and then reverses.

The next time it comes down, it makes a new lower lower from the previous low, but something

interesting is happening. The RSI made a higher lower.

So we have price making a lower low, but the RSI is making a higher low. This right here,

is called divergence and is an absolute great sign to enter a trade, especially if rsi was

previously below 25, and the price went below the lower Bollinger band.

If this happens, there s an extremely great chance the price will reverse and make a new

higher high. I just showed you how to pair Bollinger bands

with RSI and make it a profitable trading strategy. All I ask for in return is if you

can take 2 seconds out of your day and like this video.

You should also watch my other video where I go over a MACD strategy which gets an 86%

win rate, which is absolutely insane when it comes to trading.

So go check that out, and ill see you guys next time.