Bollinger Bands and RSI Divergence Trading System (2024)

FAQs

Which is better, RSI or Bollinger Bands? ›

There is no easy answer when it comes to choosing between Bollinger Bands and RSI, as both technical indicators can be useful in different ways. Bollinger Bands can be helpful for identifying overbought or oversold conditions, while RSI can be useful for spotting potential trend reversals.

By setting the upper and lower bands two standard deviations away from the SMA, Bollinger Bands create a range expected to contain approximately 95% of the security's price movements over a given period.

The Moving Average Convergence Divergence indicator is an excellent supplement to a Bollinger Bands strategy. Finding the points where the Moving Averages of the MACD cross with each other below the histogram is the simplest way to use both of those indicators together.

For example, if a stock price reaches the upper band of a Bollinger Band price channel and, at the same time, the RSI reads 70+, the trader could make the interpretation that the security is overbought. They could then sell the stock, buy a put or sell covered calls.

Limitations Of Bollinger Bands

One of these limitations is that the Bollinger Bands are essentially reactive, not predictive. The bands will react to fluctuations in price movements, either uptrends or downtrends, but will not predict prices. Like most technical indicators, Bollinger Bands are a lagging indicator.

The best combinations with Bollinger Bands are oscillators such as the RSI indicator and MACD indicator. Bollinger Bands are great at pinpointing value price areas in the market, but they do not show the price strength or weakness at such areas. This is where oscillators come in.

Which indicator has the highest accuracy? The Moving Average Convergence Divergence (MACD) indicator is often considered one of the most accurate technical indicators. That is because it uses a combination of moving averages to spot potential buy and sell signals.

Bollinger Bands typically use a 20-period moving average, where the "period" could be 5 minutes, an hour or a day.

The one-hour chart or longer is the best timeframe for the RSI divergence indicator. Is RSI or MACD Better for Divergence? The MACD is better for showing trend reversals. The RSI is better for showing overbought/oversold areas.

What is the most accurate divergence indicator? ›

Divergence Oscillators

Oscillators are most useful and issue their most valid trading signals when their readings diverge from prices. A bullish divergence occurs when prices fall to a new low while an oscillator fails to reach a new low.

One RSI trading strategy used in trending markets would be to wait for the indicator to signal an overbought condition during an uptrend. The trader then waits for RSI to drop below 50, which signals a long entry. If the trend remains in place price will typically recover off this level and move to new highs.

Understanding Moving Average Convergence Divergence (Macd)

One of the advantages of MACD is that it can provide more information on both momentum and trend direction compared to other indicators such as RSI.

As mentioned before, the normal default settings for RSI is 14 on technical charts. But experts believe that the best timeframe for RSI actually lies between 2 to 6. Intermediate and expert day traders prefer the latter timeframe as they can decrease or increase the values according to their position.

The RSI tends to remain more static during uptrends than it does during downtrends. This makes sense because the RSI measures gains versus losses. In an uptrend, there are more gains, keeping the RSI at higher levels. In a downtrend, on the other hand, the RSI tends to stay at lower levels.

However, Bollinger Bands® don't always give accurate buy and sell signals. During a strong trend, for example, the trader runs the risk of placing trades on the wrong side of the move because the indicator can flash overbought or oversold signals too soon.