Bollinger Band & Relative Strength:
bullsector.com
Basic Technical Analysis is explained in depth at Equity Alerts
This is a very brief explanation of how we use technical analysis to help us determine when
a stock we have been following may have reached an excellent buying opportunity.
In order to take full advantage of the lessons learned there investors will have to run several
charts on the stock or stocks in question. The owners of this site use Big Charts for daily
examination of technical analysis. If you would like to try it you are advised to try going to
the following URL and select bollinger bands, and RSI (relative strength) as two of your
variables using the interactive charting provided by Big Charts
Relative Strength Index - RSI
This explanation can be found as part of a larger Technical Analysis site provided by
Equity Analytics, Ltd.
RSI is a momentum indicator that measures an equity's price relative to itself. It is relative to
its past performance. It is also front weighted. Therefore, it gives a better velocity reading than
other indicators. RSI is less affected by sharp rises or drops in an equity's price performance.
Thus, it filters out some of the 'noise' in a security's trading activity.
RSI's absolute levels are 0 and 100. Traditionally, buy signals are triggered at 30, and sell
signals are triggered at 70. However, many analysts are now using 20 for buy signals and
80 for sell signals. I have found some interesting variations of these buy and sell levels.
Any analysis indicates that the buy and sell level will vary somewhat depending on the amount
of days used in the calculation. A shorter span of days will result in a more volatile indicator
that reaches further extremes. A longer amount of days used in the calculation results in a
less volatile reading, which reaches extremes far less often.
We have also found that despite the fact that RSI is designed to be able to measure multiple
equities against each other, it doesn't quite work out that way. Some securities may pull
back some when their RSI indicator reaches about 68, others at 70, etc. Different securities
seem to have slightly different levels at which the price changes direction. These levels are
close to each other. But they seem to be particular to each equity. Basically, the vast
majority do seem to change direction at 30 and 70. My point is that this is not a hard and
fast rule. There are subtle differences.
RSI treats price as a rubberband. The rubberband can be stretched just so far. After a certain
point, unless it breaks, the rubberband is forced to contract. Keep in mind that trades are not
placed on RSI alone. RSI is a momentum indicator which usually turns ahead of price. The
important thing to remember is that price is the ultimate determinant.
Bollinger bands:
Bollinger Bands do not generate buy and sell signals alone. They should be used with another
indicator. I prefer to use Bollinger Bands with RSI. This is because when price touches one of
the bands, it could indicate one of two things. It could indicate a continuation of the trend; or it
could indicate a reaction the other way. So Bollinger Bands used by themselves do not provide
all of what technicians need to know. Which is when to buy and sell. MACD can be
substituted for RSI.
However, when combined with an indicator such as RSI, they become quite powerful. RSI is an
excellent indicator with respect to overbought and oversold conditions. Generally, when price
touches the upper Bollinger Band, and RSI is below 70, we have an indication that the trend
will continue. Conversely, when price touches the lower Bollinger Band, and RSI is above 30,
we have an indication that the trend should continue.
If we run into a situation where price touches the upper Bollinger Band and RSI is above 70
(possibly approaching 80) we have an indication that the trend may reverse itself and move
downward. On the other hand, if price touches the lower Bollinger Band and RSI is below 30
(possibly approaching 20) we have an indication that the trend may reverse itself and
move upward. |
