Three Indicators, Three Separate Questions
A common mistake in strategy development is stacking indicators without asking what each one actually measures. Bollinger Bands, RSI and MACD are often displayed on the same chart, but they do not describe the same thing. Bollinger Bands measure where price sits relative to its own recent average and volatility. RSI measures the balance of recent upward force versus downward force. MACD measures the speed and direction of a trend derived from two moving averages. Because all three are calculated from the same price series, none of them contains information that price does not already contain. They repackage price into different dimensions: location, relative strength, and momentum change. That repackaging is useful only if the dimensions are genuinely different. Three indicators that all respond to the same input in the same way create an illusion of confirmation while adding little. A practical framework therefore separates indicators by function rather than by popularity. Some act as filters: they decide whether a setup is allowed at all. Others act as triggers: they decide when an entry is taken. Others act as warnings: they flag that a trend may be weakening. In the notes summarized here, Bollinger Bands serve as an entry filter that helps identify the start of a directional move, RSI serves as an auxiliary filter that discourages chasing extended moves, and MACD serves as a trend confirmation tool that can also act as a trigger and an exit warning. Each has conditions under which it behaves well and conditions under which it produces misleading readings, and understanding those conditions matters more than the indicator formulas themselves.
Bollinger Bands: Construction and the Statistical Assumption
Bollinger Bands are built from three lines. The middle band is a simple moving average over N periods, commonly 20, and represents the average price level of the recent past. The upper band is the middle band plus two standard deviations of price over the same lookback. The lower band is the middle band minus two standard deviations. The distance between the bands is therefore a direct function of recent volatility. The statistical framing is straightforward. If price changes followed a normal distribution, roughly 95 percent of observations would fall inside two standard deviations of the mean, leaving about 2.5 percent in each tail. A close above the upper band would then represent a genuinely uncommon event. The practical caveat is that market returns are not normally distributed. They show fat tails and volatility clustering, meaning extreme moves arrive in groups rather than as independent rare events. The standard deviation is also backward looking: it rises after volatility has already increased and falls after markets have already calmed. This produces two well-known behaviors. In quiet consolidation, the bands contract because recent volatility is low, and the market often resolves that contraction with an expansion move. In a strong directional trend, price can ride along the upper or lower band for an extended period. This is sometimes called walking the band, and it reflects persistent strength rather than an automatic reversal signal. The middle band functions as a dynamic reference level, not as a fixed support or resistance line. Its slope describes the direction of the recent average. Bandwidth, often calculated as the difference between the upper and lower band divided by the middle band, is a simple volatility measure. Traders who use Bollinger Bands usually care about two states: contraction, which often precedes expansion, and expansion with price pinned to one band, which describes a strong one-sided condition.
