Creating a Trading Strategy Using the RSI & the Bollinger Bands. New Ideas Using Python.
An overwhelming number of traders use the famous Relative Strength Index to help with their decisions, and although it can only serve as a confirming indicator, it nevertheless, has its weight in many trading decisions or at the very least timing the decisions. The RSI has been created by J. Welles Wilder in 1978 as a momentum indicator with an optimal look-back period of 14 bars. It is bounded between 0 and 100 with 30 and 70 as the agreed-upon oversold and overbought zones respectively. The RSI can be used through 3 known techniques:
- Oversold and overbought zones as indicators of possible short-term corrections or reversals.
- Divergence from prices as an indication of trend exhaustion (I’ve written about it here in Medium: Back-testing the RSI divergence strategy on FX in Python. Should it be used as a stand-alone strategy?)
- Drawing normal supports/resistances on the indicator just as we would do with prices.
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