In forex trading, Bollinger band and RSI are very popular indicators, traders have mastered how they can help market analysis. While Gold is one of the instruments in spot forex trading that uses the XAUUSD symbol, it has high volatility. Potential to provide high gains as well as comparable risks.
This strategy will utilize signals from Bollinger bands and RSI for Gold trading tools, both of which are built-in indicators of the MT4 platform. You don’t have to bother looking for download links or installing them on your platform.
But before going into the specific discussion, let’s take a look at the flashback about the two indicators.
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- 1 Bollinger band overview
- 2 RSI overview
- 3 Combining Bollinger band with RSI on Gold
- 4 Preparation indicator on the chart
- 5 Final thought
Bollinger band overview
Bollinger Bands is a technical indicator that is used to measure volatility and determine the direction of the trend of price movements. This indicator can also be used to find overbought and oversold conditions.
The Bollinger band indicator consists of three lines, Upper band, Lower band, and Middle band. Basically, the Middle band is a moving average line, and the Upper band and Lower band lines are deviation lines from the Middle band line.
Bollinger bands lines called the upper and lower bands, act like belts for price movement. In a sideways condition. The two bands are quite accurate as oversold and overbought areas. This indicator was created by John Bollinger, a technician trader in 1980.
What time frame is best for Bollinger bands?
Actually choosing a timeframe is more related to the trading style by each trader. In trading, we are familiar with scalping strategies, intraday trading, swing trading, and position trading.
Scalping trading which is a short-term trade is more suitable to use the M15 or M5 timeframe for accurate price details. Intraday traders who open orders in a day are more suitable to use the H1 and H4 timeframes to project daily movements.
Swing traders who open orders for more than a day are more likely to use the daily timeframe, but they will also go to a lower timeframe to get the best price.
Position traders, these are long-term trades, allow traders to hold orders for a month or two or even longer. This is more suitable with using the Weekly timeframe but also paying attention to the monthly timeframe. The longer the open order the more margin strength is required for the durability of the account.
Do Bollinger bands actually work?
Bollinger bands work especially well in sideways markets. In this condition, Bollinger bands form horizontal or flat lines, and price movements often bounce on the upper and lower bands. If you find this condition, the Bollinger band is good enough to determine to Buy or Sell by looking at the price of the Bollinger band.
Like its function, to measure volatility, the higher the market volatility, the two bands will expand, while in low market volatility, both bands will be seen to squeeze the price.
At an advanced level, the use of Bollinger bands is developed with a trading strategy called BBMA and utilizes Bollinger bands Squeeze for breakout signals.
The Relative Strength Index (RSI) is a technical analysis indicator to measure the volatility of an asset’s price. This indicator will be displayed in a new window on the mt4 chart and is a line used to find overbought or oversold positions.
The RSI is displayed as an oscillator (a chart that moves between two extreme points) with values ranging from 0 to 100. This indicator was originally developed by J. Welles Wilder Jr. and introduced in his 1978 book, New Concepts in Technical Trading Systems.
This indicator is widely used by traders and technical analysts, as the RSI measures the change in the price of an asset over 14 periods (14 days for the daily chart, 14 hours for the hourly chart, etc.).
The RSI formula is dividing the average price increase by the average loss, and the results are then placed in measurement on a scale of 0 to 100.
How to use the RSI indicator?
The RSI element consists of three main lines, namely the level 30 line, the level 70 line, and the RSI line. In its application, the RSI uses a scale of 0-100 which reflects price conditions on the market.
The simplest use of the RSI indicator is to look at the level of the RSI line against the level 30 and level 70 lines. If the RSI line shows above 70, for example at 72, in general, the price has entered overbought. But if the RSI line shows a number below 30, for example, 28, then in general the price is currently entering the oversold area.
If the price has entered the overbought and oversold area, it is possible that the trend will end soon and there will be a reversal.
In other practices, RSI users can add the 50 levels which are used to measure the bullish or bearish trend. For more settings click Properties on the RSI indicator and on the tab “levels” add for level 50.
The reading of the trend direction with the 50 RSI level is simple, if the RSI line is below the 50 levels and is pointing downwards, it means the trend is bearish. If the RSI line is above the 50 levels and is pointing upwards, it means that the trend is bullish.
What is RSI Buy Signal?
The RSI buy signal uses the RSI level as a confirmation signal, this is usually traders looking for a price reversal after the downtrend enters oversold. If the RSI line has shown below 30 traders will look for a reversal pattern, using the candlestick pattern. The confirmed candlestick pattern gives a Buy signal when the RSI is below 30.
Meanwhile, Sell signals refer to the RSI which has indicated above the 70 level in an uptrend. Where the price area above RSI 70 becomes the overbought zone, then traders analyze the reversal candlestick pattern to confirm the sell signal.
What is a good RSI number?
In advanced settings, users try to use the good numbers 20 and 80 to define overbought and oversold areas. In their opinion, the default RSI with numbers 30 and 70 often gives false signals, so changing the settings is expected to give a more accurate signal.
To change the settings via properties and edit the numbers 30 and 70 to be changed to numbers 20 and 80, it will be a new overbought and oversold signal.
Combining Bollinger band with RSI on Gold
RSI and Bollinger bands can be combined for a Gold trading tool. This is one of the most challenging trading instruments due to its often high volatility.
The spread for gold may vary between brokers, choose a low spread because it will be more profitable for traders. By combining Bollinger bands and RSI, we will get a signal filter that can prevent traders from over-trading.
Preparation indicator on the chart
The first preparation is to attach the Bollinger bands indicator to the mt4 platform chart. Call the indicator from Insert–>> Indicators–>> Trend–>> Bollinger bands. You can also use the shortcut indicator list, on your platform.
You don’t need to change the Bollinger band settings, use the default settings. This is the default setting of John Bollinger. Changing the deviation will result in a difference between the upper and lower bands.
The second step is to call the RSI indicator, you can start from Insert–>>Indicator–>>Oscillator–>> Relative Strength Index. Or you can use the indicator list shortcut button on the top bar of your platform.
To get a good overbought and oversold area, it is okay to change the 30 levels to 20 and the 70 levels to 80. Next is choosing a timeframe, on the H1 timeframe this strategy can work well if accompanied by high patience. Here is the image.
How to trade
Now we will get to the point of trading using Bollinger bands and RSI for gold trading. Here the buy rules and sell rules using this strategy.
- Open Buy will only be done if the RSI touches below the 20 levels as an oversold signal. While the price is close to the Lower band. Also pay attention to the candlestick pattern, if there is a strong indication of trend continuation, be patient and wait for a reversal signal even if the RSI value is below the 20 levels. That is a sign that the market is being filled with sellers. So it is quite dangerous if open Buy is in a strong downtrend.
- Conversely, to open Sell, if the RSI is above the 80 levels, and the price is near the upper band. Also, pay attention to the candlestick pattern, it will be safer to wait for a valid reversal signal from the price action.
- Place a stop loss above the upper band line for Sell, and below the lower band line for Buy. Target profit on the Middle band is much safer, but you may try target profit when the price approaches the band line.
If you use the trading rules mentioned above it may be very rare for signals to appear, this completely requires additional patience. It may even be that in a day there is not a single signal that complies with the trading rules.
If you are an aggressive trader, you can take advantage of pending orders on the upper and lower band lines by simultaneously placing a stop loss and profit target.
Then take advantage of the 50 RSI level as a trigger for buy and sell signals. When to Sell if the RSI line starts to cross the 50 levels from top to bottom. On the other hand, when to buy is if the RSI line is cross from below to above the 50 levels.
These rules provide more opportunities for trading signals to appear, but the risk will also be higher.
Even though Gold has a high moving average even thousands of pips, what needs to be paid attention to is when there is high impact news that affects the USD.
High volatility may make it difficult for traders to capture profits. Therefore, it is advisable to always read the latest news about the economic calendar schedule or other important fundamental news. High price volatility causing prices to rise and fall quickly may trigger traders’ emotions.
And again, traders must be disciplined in managing their risk, this does look a bit bad if you always hit stop loss, but remain stop loss is necessary as an anticipatory step against the trend
Trading Gold is indeed very challenging, its wild movements allow traders to make quick profits. However, its volatility carries its own risks.
If the trader has patience, this strategy is very good and works especially well in ranging market conditions. But there is no perfect strategy, this combination of Bollinger bands and RSI also has its own weaknesses.
Note: This article is only information and not investment advice, forex trading is a high risk, spend money ready to lose, and each is responsible for his investment
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