If you are a trader, whether new or experienced, you may know that Bollinger Bands and RSI are one of the simplest indicators. However, when combined, they become an extremely powerful trading tool. Especially in trendless market conditions, these two indicators will help investors determine when the market is overbought or oversold. So how will Bollinger Bands and RSI work when combined? Let’s find out more about Crypto Trading through the following article!
What are Bollinger Bands and RSI in the Crypto Market?
In the cryptocurrency market, Bollinger Bands and RSI indicators are always popular with many traders. Because they are not only simple to use but also help traders make accurate forecasts. So what are the specific concepts of these two types of Indicators?
Specific Concept of Bollinger bands and RSI
First, we will learn about Bollinger Bands in general. Bollinger Bands is a technical analysis indicator that works based on the Moving Average and standard deviation of price. Through the movement of price candlestick patterns, this indicator will help investors determine the next trend in the market.
So how is the term RSI understood? RSI can be understood as a relative strength index. The RSI signal will be formed based on measuring market volatility over a specific period (usually 14 periods). Based on that, traders can determine the overbought/oversold point and calculate the most reasonable entry/exit point. In particular, RSI also includes other small indicators such as Stochastic RSI indicator or Convergence RSI , and RSI divergence…
See more: What is so important about RSI that investors?
Why combine RSI and Bollinger Bands?
Combining technical indicators is always encouraged by experts. Due to its compensatory nature, it can bring signals with a higher probability of accuracy. However, not all combinations are effective. On the contrary, it will interfere with the signal and make it difficult for investors to trade. So why can Bollinger Bands and RSI be combined? Because:
- Bollinger Bands and RSI indicators correspond to fast and slow indicators:
RSI is a leading indicator and it shows the momentum of the market earlier than the price. Unlike Bollinger Bands, its signal follows the price information. That is why these two indicators become a perfect combination, compensating for each other’s shortcomings.
- Combination of momentum indicator and volatility indicator:
According to the Crypto Trading principle, traders should not combine indicators of the same type. For example, RSI or MACD, because they are both Momentum indicators. But Bollinger Band with RSI is completely reasonable. They do not conflict but can support each other. Thereby helping traders have a more comprehensive and objective view of the market.
Advantages of combining RSI Indicator with Bollinger Band
To help readers have more confidence when using the combination of these two Indicators. Here are the advantages of this combination compiled by Crypto Trading:
- More indicators add signals, so Bollinger Bands and RSI can help investors identify more information. Even if there are no buy/sell conditions, traders can still identify overbought/oversold points.
- While the RSI indicator often encounters noise signals and false information, Bollinger Bands will help it overcome that. Thereby eliminating false signals, and helping traders avoid losing trades.
- Bollinger bands and RSI are like born for each other. Because it is calculated and applied perfectly without causing conflict. That helps investors take better advantage of overbought and oversold signals.
- Using RSI and Bollinger Bands also provides flexibility, allowing application across many different markets, including Crypto, Forex, stocks…
How will Bollinger bands and RSI work when combined?
As mentioned above, each indicator has its own operating principle and calculation method. So when combining Bollinger bands and RSI , how will they operate to ensure safety? That is the signal information about the overbought/oversold state of the market. Specifically:
- RSI indicator: Signals overbought when RSI > 70 and oversold when RSI < 30
- Bollinger Band: Although this indicator shows the level of price volatility, it is still possible to see overbought/oversold conditions through that data.
These two indicators have different calculation methods, so the overbought/oversold principle is also formed differently. Therefore, we can see that the combination of these indicators is accurate without being redundant or contradictory.
How to trade effectively when combining Bollinger bands and RSI
Combining Bollinger Bands and RSI is a trading method that is considered quite objective. However, traders need to know how to trade effectively with the set strategy. Below are 2 principles of combination when Crypto Trading that you should know:
See more: Instructions for opening an MEXC global account
Apply according to Crypto Trading purchase principles
According to the purchasing principle, you can follow the following factors in turn:
- First, investors must be patient for the candle to form, then wait for the candle to touch or penetrate the Bollinger Bands. Note that both the Bollinger Bands and RSI need to be below 20.
- Continue to look for another candle that crosses the Bollinger Bands. At that time, the RSI indicator should be above 20 and the Bollinger Bands should be at or above 40.
- Start setting a stop loss order below the yellow Bollinger Band. Or you can set a Stop Loss order below the orange band. And the Take Profit order is at the middle Band line.
Apply Bollinger bands and RSI according to the selling principle
For the selling principle, traders can follow the following sequence:
- Traders must wait for the candle to appear touching or penetrating the red Band line. At that time, both Bollinger bands and RSI must be above 80.
- Next, when the candle returns and crosses the red Bollinger band, the RSI indicator must also return below 80 and the Bollinger crosses below 60 to establish a sell order.
- Place your Stop Loss above the orange Bollinger Band. If you want to be safer, you can place your stop loss above the orange band. And your take profit will be in the middle Band.
Important Notes When Trading Crypto Trading with RSI and Bollinger Bands
In addition, when combining Bollinger bands and RSI, traders also need to pay attention to a special case. That is, when the candle crosses the orange and red lines, absolutely do not participate in the transaction. Because this is the time when it is difficult to determine the exact profit-taking point. If you trade in this situation, the profit risk will be extremely high.
Summary:
In short, combining Bollinger bands and RSI a quite an effective choice for traders. However, to trade correctly, investors need to clearly understand how to apply the operating principles. If the above article on Crypto Trading cannot answer all your questions. Please continue to follow the new articles from our website system!
FAQs:
Are there any disadvantages to using Bollinger Bands and RSI?
This method requires extensive experience and advanced techniques from long-time traders.
What mistakes do traders often make when combining Bollinger with RSI?
Most traders do not pay attention to the lag properties. That can create false signals, disrupting trading.
Can Bollinger be combined with any other RSI indicators?
Additionally, traders can use Bollinger Bands with RSI divergence to identify signals.
