Bollinger Bands RSI Momentum Forex Trading Strategy

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Bollinger Bands RSI Momentum Forex Trading Strategy

Price is basically the result of an equilibrium of perceived fair value between buyers and sellers. It is the point where buyers are willing to buy, and sellers are willing to sell because both parties agree that the price is fair enough. There are market conditions which would often show a market perceiving price to be fair within a short range. Price would be moving up and down within a tight range as buyers and sellers are willing to trade at those price levels.

However, human psychology is very complicated and ever changing. What the market may deem as a fair price one moment could be considered as unfair the next hour. This changing market perception cause price valuations to become imbalance at times, which in turn cause volatility. Although it may seem counter intuitive, but it is in these areas where price is unfair where many traders could make a lot of money. This is because these imbalances cause price to move rapidly towards the area where the market would again find equilibrium. This causes a rapid movement in price which is identified as momentum. This could cause the market to create a run or a new trend, both of which could be very profitable for traders.

Bollinger Bands RSI Momentum Forex Trading Strategy is a trading strategy which identifies if price has broken out of a tight range. It trades as price breaks out of these ranges and starts to develop strong momentum which could result in a trend or a run.

Bollinger Bands

The Bollinger Bands indicator is a very useful technical indicator. It is a trend following indicator which has many uses. Traders use it to identify trend direction, momentum breakouts, mean reversals and volatility.

The Bollinger Bands is plotted with three moving lines. The middle line is a Simple Moving Average (SMA) usually set at 20 periods. The outer lines or bands are standard deviations derived from the middle line.

Because the middle line of the Bollinger Bands is a Simple Moving Average line, traders could use it to identify trend direction just like the usual moving average lines. Traders could identify trend direction based on the location of price in relation to the midline, as well as based on its slope.

Traders also use the Bollinger Bands to identify momentum breakouts. This is usually based on a momentum candle breaking and closing beyond the outer lines of the Bollinger Bands.

Conversely, the same outer lines could also be used to identify mean reversals. If price action show signs of price rejection on the area of the outer lines, there is a high possibility that price would reverse back to its mean. These price rejections are characterized by long wicks pushing against the outer lines.

Lastly, traders also use the Bollinger Bands to identify volatility. Because the outer bands are based on standard deviations, it also tends to contract and expand along with price volatility. The outer bands tend to contract during market contraction phases and expand during market expansion phases.

RSI Filter

The RSI Filter indicator is a custom momentum technical indictor based on the Relative Strength Index (RSI).

The classic RSI is an oscillating indicator which identifies trend bias, mean reversions and momentum. It plots a line that oscillates from 0 to 100. The market is considered to have a bullish bias if the line is above 50, and a bearish bias if the line is below 50. It also has markers at level 70 and 30. Momentum is identified whenever price breaches above 70 or drops below 30. Inversely, the market is mean reverting whenever the line hooks back toward the midline coming from level 70 and 30.

The RSI Filter indicator identifies momentum based on the breaching of price beyond 70 or 30 range. It then plots bars to identify the direction of momentum. Positive bars indicate a bullish momentum, while negative bars indicate a bearish momentum.

Trading Strategy

This trading strategy is a momentum breakout trading strategy that trades on confluences between the momentum signals of the Bollinger Bands and the RSI Filter indicator.

The Bollinger Bands is a good momentum indicator if used correctly. Momentum is often identified based on price closing beyond the outer lines of the Bollinger Bands. However, there is another thing to consider when trading momentum breakouts, which is the contraction and expansion phase. Momentum breakouts are more powerful when it comes from a market contraction phase. Traders should look for markets that are on a market contraction phase based on the Bollinger Bands. Then, we wait for price to break out of the contracted Bollinger Bands. Another confirmation would be price breaking the high or low of the breakout candle. This would confirm the breakout from the contracted market.

The RSI Filter confirms the momentum breakout based on the shifting of the bars. This coincides with the traditional momentum signal based on the RSI indicator.

Indicators:

  • Bollinger Bands (default setting)
  • RSIFilter (default setting)

Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts

Currency Pairs: FX majors, minors and crosses

Trading Sessions: Tokyo, London and New York sessions

Buy Trade Setup

Entry

  • The Bollinger Bands should be contracted.
  • A bullish momentum candle should break above the upper Bollinger Band line.
  • The RSI Filter should shift to positive.
  • Enter a buy order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the fractal below the entry candle.

Exit

  • Close the trade as soon as price closes below the lower Bollinger Band line.

Bollinger Bands RSI Momentum Forex Trading Strategy

Bollinger Bands RSI Momentum Forex Trading Strategy 2

Sell Trade Setup

Entry

  • The Bollinger Bands should be contracted.
  • A bearish momentum candle should break below the lower Bollinger Band line.
  • The RSI Filter should shift to negative.
  • Enter a sell order on the confirmation of these conditions.

Stop Loss

  • Set the stop loss on the fractal above the entry candle.

Exit

  • Close the trade as soon as price closes above the upper Bollinger Band line.

Bollinger Bands RSI Momentum Forex Trading Strategy 3

Bollinger Bands RSI Momentum Forex Trading Strategy 4

Conclusion

Momentum breakouts are excellent trade setups to capitalize on market momentum. These entry points are usually the start of runs and trends, which is one of the most profitable type of market condition if traded correctly.

However, trading momentum breakouts should not be done blindly as this might cause traders to chase price.

This strategy allows traders to systematically trade momentum breakouts coming from contracted market phases, which in itself is a high probability momentum breakout entry. On top of this, we have also added the RSI Filter confirmation, which improves the probabilities even more.

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