RSI+Bollinger Bands

The RSI+Bollinger Bands indicator combines a standard Relative Strength Index with Bollinger Bands applied directly to the RSI line to help traders identify "fake" divergences and volatility-adjusted momentum extremes.

Usage

The Usage section focuses on identifying trend strength and momentum shifts through the interaction between the RSI and its volatility bands.

A key application is the identification of "hidden" or "fake" divergences. In a standard RSI divergence scenario (e.g., price makes a higher high while RSI makes a lower high), the Bollinger Bands provide additional context. If the first RSI peak is contained within the bands but the second (lower) peak pushes outside the bands, this may suggest that the momentum is still strong despite the lower RSI value, potentially signaling a "fake" divergence. Conversely, when the RSI breaks outside the bands and then fails to do so on a subsequent peak, it can signal waning momentum.

Details

This tool applies the Bollinger Band calculation (Simple Moving Average and Standard Deviation) to the RSI output rather than price data. This transformation creates dynamic overbought and oversold levels that adjust based on the recent volatility of the RSI itself. While traditional static levels (70/30) are included, the bands offer a more flexible threshold that expands during high-volatility moves and contracts during consolidation.

Settings

• RSI period: Determines the number of bars used to calculate the Relative Strength Index (default is 14).
• Bollinger Bands period: The lookback period for the SMA and Standard Deviation used to create the bands (default is 20).
• Bollinger Bands parameter: The multiplier for the Standard Deviation, which determines the width of the bands (default is 2).
• Overbought threshold: Sets the fixed horizontal line for the upper overbought level (default is 70).
• Oversold threshold: Sets the fixed horizontal line for the lower oversold level (default is 30).

FAQ

How do I interpret the RSI crossing the Bollinger Bands?

When the RSI crosses above the Upper Band, it indicates a period of high positive momentum. If it crosses below the Lower Band, it indicates high negative momentum.

What is a "fake" divergence in this context?

A fake divergence occurs when the RSI shows a lower peak while price shows a higher peak, but the RSI’s volatility (relative to its bands) indicates that the second peak is actually more significant in its own distribution than the first.

How can I access this indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.