Technical Stock Analysis - Bollinger Bands and RSI

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Unformatted text preview: n a false move, preceding a strong trend in the opposite direction. A contracting range [C] is evident in June 1998: the bands converge to a wid#th of $2, followed by a breakout in July to a new high. A move that starts at one band normally carries through to the other, in a ranging market. A move outside the band indicates that the trend is strong and likely to continue - unless price quickly reverses. Note the quick reversal [QR] in early August. A trend that hugs one band signals that the trend is strong and likely to continue. Wait for divergence on a Momentum Indicator to signal the end of a trend.</p> In this example, 20 day Bollinger Bands at 2 standard deviations and 10 day Rate of Change.<br/> <img recindex="00002"/><br/> <h3>1. Go short [S] - bearish divergence on ROC. <br/> 2. <p>Contracting Bollinger Bands [C] warn of increased volatility. This begins with a false rally</p></h3> <p>(note the ROC triple divergence) followed by a sharp fall. </p> 3. Go long [L] - price hugs the lower band, followed by a bullish divergence on ROC.<br/> 4. Go short [S] - price hugs the upper band, followed by a bearish divergence on ROC.<br/> <h2><b>RSI Relative Strength Indicator</b></h2> <p>Developed by J. Welles Wilder and introduced in his book, New Concepts in Technical Trading Systems, the Relative Strength Index (RSI) is an extremely popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. Wilder recommends using 14 periods.</p> <p>The RSI's full name is actually rather unfortunate as it is easily confused with other forms of Relative Strength analysis. Most other kinds of "Relative Strength" stuff involve using more than one stock in the calculation. Like most true indicators, the RSI only needs one stock to be computed. In order to avoid confusion, avoid using the RSI's full name and just call it "the RSI."To be used in conjunction with Bollinger Bands, the Relative Strength Indicator or index is based on a ratio of the average upward changes to the average downward changes over a given period of time. It has a range of 0 to 100 with values typically remaining between 30 and 70. Higher values indicate overbought conditions while lower values indicate oversold conditions.</p> <p>The Relative Strength Index at the beginning of a data series is not defined until there are enough values to fill the given period. In addition, the value is defined as 100 when no downward changes occur during the given period. The Relative Strength Index (RSI) is typically used with a 9, 14, or 25 calendar day (7, 10, or 20 trading day) period against the closing price of a security or commodity. The more days that are included in the calculation, th...
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