John Bollinger, a financial analyst and trader developed Bollinger Bands, Bollinger Band Width, and %B in the 1980s to enhance market analysis by accounting for volatility and price movements. Discover how professional traders use technical indicators with market structure to execute high-confidence trades. Bollinger Bands use standard deviation to determine band width, which makes them more responsive to volatility spikes. Keltner Channels use Average True Range (ATR), resulting in smoother, less reactive bands.
Because of lower volatility, XLU will have consistently lower BandWidth values than XLK. The 200-day moving average of XLU BandWidth is below five, while the 200-day moving average of XLK BandWidth is above seven. It is typically best to look for trading signals generated by the %b during strong or clearly defined uptrends or downtrends. “Walking the Bands” is a situation when during a strong uptrend or downtrend, price frequently breaks through above the Upper Band (in an uptrend) or below the Lower Band (in a downtrend). When price is “Walking the Bands” these breakthroughs are not actual reversal signals.
For such reasons, it is incorrect to assume that the long-term percentage of the data that will bollinger bands bandwidth be observed in the future outside the Bollinger Bands range will always be constrained to a certain amount. Various studies of the effectiveness of the Bollinger Band strategy have been performed with mixed results. The authors did, however, find that a simple reversal of the strategy (“contrarian Bollinger Band”) produced positive returns in a variety of markets.
It becomes a pillar of strategy validation, enabling a meticulous study of the band disparities during fluctuating market volatilities. Hakan Samuelsson and Oddmund Groette are independent full-time traders and investors who together with their team manage this website. They have 20+ years of trading experience and share their insights here.
If the middle band moves up, it suggests an uptrend; a downward movement suggests otherwise. Narrow bands indicate less volatility, which means a significant price move could be imminent. This is known as a “squeeze.” Conversely, wide bands indicate more volatility.
The Bollinger Band Bandwidth Indicator is a powerful tool used to measure the volatility of a security. It is derived from the Bollinger Bands, which are a popular technical analysis tool created by John Bollinger. The Bandwidth Indicator, on the other hand, measures the width between the upper and lower Bollinger Bands. It represents the percentage difference between the two bands and provides traders with a visual representation of volatility. When the bandwidth is narrow, it indicates low volatility, while a wide bandwidth suggests high volatility. The intuitive and graphical representation of the Bollinger Bands, complemented by the quantifiable Bollinger Bandwidth, makes it easier for traders to visualize market volatility at a glance.
If the second low is above the lower band, it is generally assumed that it is a double bottom and there is a strong chance that it will be an uptrend. Bollinger Band strategy is used to identify a period where the bands have squeezed together indicating that there is a breakout which can happen. If price breaks above the upper band and MACD shows strong bullish momentum, you might have a “walking the bands” scenario rather than an immediate reversal. In powerful trends, price doesn’t bounce off the bands—it walks along them like a tightrope walker. This isn’t a reversal signal; it’s a confirmation that the trend has serious momentum.
For a quick refresher, Bollinger Bands encapsulate price and are two standard deviations from the 20-period simple moving average (SMA). Traders are often inclined to use Bollinger Bands with other indicators to confirm price action. In particular, the use of oscillator-like Bollinger Bands will often be coupled with a non-oscillator indicator-like chart patterns or a trendline. If these indicators confirm the recommendation of the Bollinger Bands, the trader will have greater conviction that the bands are predicting correct price action in relation to market volatility. Bollinger BandWidth (BBW) be quite a useful technical analysis tool for identifying “The Squeeze” which can result in some nice buying or selling signals. Sometimes the breakout after a Squeeze setup has an immediate pullback and the rally never happens.
Several case studies have highlighted how this volatility indicator has been adeptly utilized for enhancing trading system performance. The impact of market sentiment on Bollinger Bands Width can be huge because market sentiment can influence price volatility, which, in turn, influences Bollinger Bands Width. When market sentiment is high, the Bollinger Bands Width indicator is likely to rise, and when sentiment is low, the width decreases. In the chart below, you can see a tight price consolidation (grey rectangle). Eventually, the price broke out of the rectangle (white arrow) and trended upward.
Traders should adjust the parameters (e.g., the moving average period and standard deviation multiplier) to better suit the asset and trading style they are using. One strategy effective for the relatively low-risk individual who is content with low but safe returns on their investment is to trade by keeping the SMA as the signal to enter or exit the trade. Since the SMA is essentially an average and the price keeps swinging from one side of the SMA to the other, you are bound to end up with a profit. The Upper Bollinger band is constructed by moving 2 standard deviations above the 30-day moving average. Master the basic bounce and breakout strategies in different market conditions. Most importantly, backtest everything on your favorite trading instruments before risking real money.
This methodology facilitates a more informed trading decision-making process and underscores the importance of a synchronous relationship between various analysis tools. The versatility and widespread support of Bollinger Bands Bandwidth bolster its position as an invaluable component within a trader’s analytical arsenal. The Bollinger Bands squeeze is a crucial signal within the framework of Bollinger Bandwidth analysis, signaling a reduction in volatility and typically preceding a sharp price breakout. When the bands constrict, traders vigilantly anticipate a surge in volatility, which frequently leads to significant market moves.
Another common strategy is to look for reversals when the price breaks out of the Bollinger Band. For example, if the price has been in a downtrend and then breaks above the upper Bollinger Band, this could be a sign that the trend is reversing. The tightening of Bollinger Bands could also mean there’s no consensus among market participants about the future direction of the price. This indecision can result in the price oscillating within a tighter range until new information arrives or the market forces a breakout.
I often plot both indicators on the same chart to look for convergence between their signals. I’ve personally witnessed the power of this strategy in numerous markets. One particularly memorable instance occurred on the Gold daily chart, where price had been consolidating in a narrow range for several weeks, causing the Bollinger Bands to contract significantly.
Traders often view this as a sign that a period of low volatility is about to end and that a significant price move could be imminent. They may use this information to plan for potential breakouts or reversals. Traders can adjust the parameters of the Bollinger Bands, such as the period and standard deviation, to suit their trading style and the market they are analyzing. It is important to note that the Bandwidth Indicator is not a standalone trading strategy, but rather a tool that can complement other analysis techniques. The hallmark of powerful trend-following strategies is the ability to enter trades at just the right moment when the market shows clear direction.
A low Bollinger Band Bandwidth indicates a period of low volatility in the market. The information on market-bulls.com is provided for general information purposes only. Market-bulls.com does not accept responsibility for any loss or damage arising from reliance on the site’s content. Users should seek independent advice and information before making financial decisions. The utility of Bollinger Bands Bandwidth in trading is multifaceted, offering several key advantages that can contribute to the enhancement of trading performance. Conversely, when the indicator is rising so fast toward 1 (100%), the price might be getting overextended in that direction.