A Bollinger Band® is a technical analysis tool defined by a set of trendlines. They are plotted as two standard deviations, both positively and negatively, away from a simple moving average (SMA) of a security’s price and can be adjusted to user preferences. In the chart below, Bollinger Bands® bracket the 20-day SMA of the stock with an upper and lower band along with the daily movements of the stock’s price. Because standard deviation is a measure of volatility, when the markets become more volatile the bands widen; during less volatile periods, the bands’ contract. When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities.
Bollinger Bands® was developed by technical trader John Bollinger and designed to give investors a higher probability of identifying when an asset is oversold or overbought. However, traders use the two indicators in a different manner. For example, there are those who use Bollinger Bands in trend-following and those who use it to find reversals. This happens by looking at where the price is in relation to the Bollinger Bands indicator. Bollinger Bands is a popular technical indicator that was developed by John Bollinger. It is a useful indicator that brings a new twist to the role of moving averages.
Indicators D ~ L
A good example of a double-top pattern is shown in the chart below. As you can see, the BTC/USD pair formed a double-top at 44,891 and a chin at 41,460. The indicator started moving upwards as the bearish breakout happened. Securities with low volatility will have lower BandWidth values than securities with high volatility.
- As previously discussed, low periods of volatility precede high periods of volatility.
- We’d also like to point out that the Bollinger Band Width is particularly useful in the Bollinger Squeeze strategy.
- To understand what Bollinger Bandwidth is, we need to first look at what Bollinger Bands are.
- For a given data set, the standard deviation measures how far numbers are from an average value.
Trading in the financial markets can be a risky endeavor with just as much potential for reward as gain. Basic Options contracts are no exception to this rule and carry significant risks. If you notice the volatility easing the initial push could be enough for the security to climb the wall of worry. You can jump onboard the trend with a close stop below the most recent low.
Indicators V ~ Z
This result will show you the absolute difference between the two. Now, to get the Bollinger Bandwidth, you then divide the middle band to normalize the value. Once the study is defined, you can elect to uncheck/check to remove and add the study to your chart. Use failure swings on
Welles Wilder’s Relative Strength
Index to confirm the signals.
Therefore, in most cases, the Bollinger Bandwidth will not show you a signal of when to buy or sell an asset. Instead, it will guide you to be prepared of what will happen in the coming days. Because of how it works, the Bollinger Bandwidth does not have a close resemblance to Bollinger Bands. As shown below, the indicator is an oscillator that moves up and down. See Indicator Panel for directions
on how to set up an indicator — and
Edit Indicator Settings to change the settings.
What Is the Bollinger Band Width
The width normally wides when Bollinger Bands widens and then increases when the Bollinger Bands rises. Therefore, it is an important indicator used to measure volatility in the financial market. Bollinger Band Width is derived from Bollinger Bands and measures the
percent difference between the upper and lower bands.
- The width normally wides when Bollinger Bands widens and then increases when the Bollinger Bands rises.
- Ideally, the Bollinger Bands indicator is usually narrow when there is no market volatility while its gap increases when market conditions change.
- The second step is to subtract the value of the lower band from the upper band.
- The middle line is the asset’s moving average while the two outer lines are the standard deviations.
- The difference between the two bands can then be used as a filter for market entries; a narrowing of the width between the two bands is a condition for entry.
The chart above shows the Nasdaq 100 ETF (QQQ) with Bollinger Bands, BandWidth, and the Standard Deviation. Notice how BandWidth tracks the Standard Deviation (volatility) – both rise and fall together. The image below shows a spreadsheet with a calculation example. Bollinger BandWidth is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger refers to Bollinger BandWidth as one of two indicators that can be derived from Bollinger Bands (the other being %B).