If you are a trader following the technical analyst and reversal trading style, then combining indicators together will offer a safe signal. And the most necessary are the conditions that increase the win rate and reduce the risk when opening orders. This article guides you through the combination of the Bollinger Bands and RSI indicator to find a safe entry point.
Video on how to conduct reversal trading using Bollinger Bands combined with RSI
Bollinger Bands indicator
Bollinger Bands is a tool developed by John Bollinger in the 80s of the last century. This indicator appears as one of the very useful tools to analyze market price movements. It works somewhat better than other tools such as Stochastics, SMA, etc.
Bollinger Bands is a combination of moving averages and standard deviation. The Bollinger Bands indicator has 3 basic elements as follows:
– Moving Average: is a moving average using 20 periods as default; SMA (20).
– Upper Band: is the upper band. It usually has a standard deviation of 2. It is calculated from the price of 20 consecutive periods, located above the SMA (20).
– Lower Band: is the lower band. It usually has a standard deviation of 2. It is calculated from the price of 20 consecutive periods, located below the SMA (20).
How to set up Bollinger Bands indicator in IQ Option
To set up the Bollinger Bands indicator, you should do as follows. Select the “Indicator” icon => “Volatility” tab => Select “Bollinger Bands”.
In IQ Option, the usual Bollinger Bands is of Period 14 – Deviation 2 (14-period moving average and standard deviation of 2). These are not common values of the Bollinger Bands indicator. You can adjust these parameters to Period 20 – Deviation 2.
What few traders note when using the indicator is to make it bold for convenient observation. If you want to make it bold, just select “Colors and display” and then “Apply”
=> Most of the time, prices fluctuate within the bands of the Bollinger Bands indicator. Based on that, traders will conduct reversal trading when the price is out of the upper or lower band. To know exactly when price reverses, we combine it with the RSI indicator.
RSI (Relative Strength Index) indicator
RSI is a relative strength index indicator. The RSI was developed by Mr. J.Welles Wilder. It appears as an indicator of price fluctuations and changes. RSI ranges from 0 to 100 to measure overbought and oversold of the market.
According to Wilder’s theory, when RSI is below 30, it indicates that the market is in an oversold condition. Conversely, if RSI is above 70, it indicates that the market is in an overbought condition. When overbought or oversold conditions occur, the market is in the expectation of reversing in the opposite direction.
There is an interesting thing about the indicator that if you have not experienced much, you can not know. It is the appearance of a bearish or bullish divergence, seen by traders as a reversal signal. They are highly accurate but rarely appear on the price chart.
How to set up the RSI indicator in IQ Option
In order to set up the RSI indicator, follow these steps. Click the “Indicator” icon => “Momentum” tab=> Select “Relative Strength Index”.
The default of IQ Option is Period 14. You can customize to suit your strategy.
You can also make it bold to observe the price at your convenience.
Capital management method
With the classic method of capital management (balanced investment), a 60% win rate will offer a profit.
How to trade in IQ Option when combining Bollinger Bands and RSI
Use the Bollinger Band indicator to see if the price is outside the upper or lower band. It is also the time that prices are likely to turn back into the bands. Combine it with the RSI indicator to see if it is in the overbought or oversold zone to accurately predict the reversal.
The combination of the 2 indicators helps us overcome the disadvantages when using them individually. From there, they create a reversal entry point with the highest winning rate for opening an order.
How to open an order when combining the Bollinger Bands with RSI
HIGHER = The price closes outside the lower band + RSI indicator is in the oversold zone.
LOWER = The price closes outside the upper band + RSI indicator is in the overbought zone.
RSI divergence is the phenomenon of RSI moving against the price. That is when the price increases but the RSI strength index decreases. Conversely, the price is down but the RSI is up.
HIGHER = When prices continually create new lower troughs but the RSI is up (bullish divergence).
LOWER = When prices continually create new higher peaks but the RSI is down (bearish divergence).
Through this article, you will find a reasonable entry point when combining the Bollinger Bands with RSI. Trade on your own and experience the above reversal strategy with your Demo account. In the upcoming articles, there will be good entry points used for trading with real money. Please stay tuned if this is the right strategy for you.