The Road to Successful Trading

prices start to hug close to the band, it can mean an overbought (upper band) or oversold 
(lower band) condition. In other words, a trend reversal is possible. 
As in all indicators, other indicators should provide confirmation. In the case of Bollinger Bands, 
the On Balance Volume indicator can provide good verification. 
Relative Strength Index
The Relative Strength Index (RSI), an oscillator developed by Welles Wilder, measures the 
momentum strength of a stock by monitoring changes in its closing prices. RSI fluctuates between 0 
and 100. RSI peaks indicate overbought levels and suggest price tops, while RSI troughs denote 
oversold levels and share price bottoms.
Two horizontal reference lines are normally placed at 30 (indicating an oversold area) and 70 
(indicating an overbought area). These reference lines can be adjusted depending on the market 
environment. Some analysts move these lines to 40 and 80 in bull markets (raising the bar, so to 
speak) and lower them to 20 and 60 in bear markets. 
It is advised that traders use the “five-percent” rule - RSI spends less than five percent of the time 
beyond either reference line over a six-month period. You can adjust these reference lines every 
three months (once per quarter).
There is no “holy grail” level dictating guaranteed overbought or oversold readings. RSI can stay 
overbought in bull markets and oversold in bear markets for prolonged periods. Like most 
indicators, you will become accustomed to using RSI, getting a “feel” for what works best for 
you. 
Divergence 
The most significant signal is generated on “bullish” or “bearish” divergences between the RSI and 
the price of the underlying stock. A bullish divergence gives a “buy” or long signal and occurs 
when the stock price makes a new near-term low, but the RSI makes a shallower trough