Combine adaptive bands with the Relative Strength Index and volume-weighted RSI

From fixed envelopes to adaptive bands

Fixed-percentage envelopes around a moving average required repeated trial-and-error width selection because a width that contained most of the prior year's prices often stopped fitting later.

Bollinger Bands recalculate volatility each period and pair it with a moving average. The result is a self-adaptive envelope defined as that average plus or minus two standard deviations of the same series.

Relative location and width

The envelope is used only to classify relative price location. Contact with the upper band is treated as relatively high, and contact with the lower band is treated as relatively low.

Two companion readings are derived from the envelope. The location reading is 1.0 at the upper band, 0 at the lower band, and 0.5 at the middle. The width reading is the upper-minus-lower distance divided by the middle band.

Very low envelope width is treated as a forecast of later volatility expansion. A peak or rollover in width after a large expansion is treated as a transition toward consolidation or a possible reversal that still needs other indicators to classify.

Walks, tags, and confirmation

A walk along a band is typically announced by a move that punches outside the envelope, then continues as pullbacks leave price traveling in the upper or lower portion of a roughly constant-width channel.

A tag of either band was originally checked against confirming indicators, often volume- or breadth-based. Confirmed strength or weakness was treated as continuation, and a failure to confirm was treated as the opposite signal.

Momentum, participation, and reversal

The Relative Strength Index is treated as a useful momentum companion to the bands. A volume-weighted RSI is preferred so that participation can confirm or fail to confirm the price move.

A two-step reversal filter first requires an overbought or oversold extreme that is the most severe reading of the past year, then requires a traditional momentum indicator to show enough strength to break the prior trend.