Bollinger Bands is one of the most versatile indicators in technical analysis. It can offer valuable information about a couple of market dimensions at the same time. Being constructed around a simple Moving Average, it indicates the short-term trend. The standard deviation that forms the upper and lower band gauge the market volatility. One important fact to know about this indicator is that 95% of the time, price will remain between the two standard deviation lines. The waving motion of the price above and below the simple Moving Average indicates the energy waiting to be tapped. Price reaching beyond the upper and lower bands is an abnormal situation that signals a momentary imbalance in the market. Trades can be entered on every instance when the price reached outside of the bands, in an assumption that price will return inside the bands.
If the price does not have enough momentum to sustain it. markets tend to equalize the imbalance. Then the price reverts to the mean. To further improve the accuracy of entries, we can couple the Bollinger Bands with an oscillator. The Relative Strength Index is one such indicator that can offer the confluence we need. Matching the periods of two indicators will make them work in step. Having the period of RSI will make it go overbought or oversold more easily. We are looking for places where the price show exhaustion. RSI can be overbought or oversold. Another way of highlighting the momentum decrease is by observing divergences. It indicates the weakness of the existing trend and a reversal of trend is likely.