As you can see, the Bollinger Bandwidth remained in a tight range before the stock collapsed. On the right side, the Bollinger Bandwidth remained at elevated levels ahead of the next earnings. 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.
In fact, Bollinger Bands® should be used with other non-correlated indicators. Doing so may give you additional market signals that are much more direct. Another drawback is that they are calculated using a simple moving average. That’s bollinger bands bandwidth because older price data is weighted in the same way as recent data. In the 1980s, John Bollinger, a long-time technician of the markets, developed the technique of using a moving average with two trading bands above and below it.
The upper and lower bands are based on the standard deviation, which is a measure of volatility. The bands narrow as price flattens or moves within a relatively narrow range. The theory is that periods of low volatility are followed by periods of high volatility. Relatively narrow BandWidth (a.k.a. the Squeeze) can foreshadow a significant advance or decline.
How to Apply the Bollinger Bandwidth Strategy
When that happens, a cross below the 20-day moving average warns of a trend reversal to the downside. This can be taken from price action, Bollinger Band® and other technical methods. This indicator shows the bollinger bands against the price all expressed in percentage of the mean BB value.
Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
- Bollinger Bands Width serve as a way to quantitatively measure the width between the Upper and Lower Bands.
- This indicator shows the bollinger bands against the price all expressed in percentage of the mean BB value.
- Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
- Most chart engines plot the indicator as an oscillator beneath the price chart.
One of the key features of this BB%B is its ability to highlight overbought and oversold conditions. This allows you to make informed decisions on when to enter and exit a trade, helping you maximize your profits and minimize your losses. – Bollinger Bands %B with the ability to change to a different Time Frame.(Defaults to current Chart Time Frame).
Scanning for Bollinger Bands
Chart 2 shows Nordstrom (JWN) with a W-Bottom in January-February 2010. First, the stock formed a reaction low in January (black arrow) and broke below the lower band. Third, the stock moved below its January low and held above the lower band. Even though the 5-Feb spike low broke the lower band, the signal is not affected since, like Bollinger Bands, it is calculated using closing prices.
Lagging indicators are best used in combination with leading indicators. This low was also a test of a prior low with the candle completely outside of the Bollinger band. According to John Bollinger, the fall in the Bollinger Bandwidth indicator below 2% or 0.02 has led to big moves in the S&P500 index. Conversely, when the upper and lower Bollinger bands tighten, an impulsive move is likely right around the corner. In this article, I am going to cover some basic trading techniques you can use with the Bollinger Bandwidth indicator. Before we dive into the strategies, let’s first discuss the indicator.
Approximately 90% of price action occurs between the two bands. The breakout is not a trading signal and many investors mistake that when the price hits or exceeds one of the bands as a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade. The bands do not indicate when the change may take place or in which direction the price could move. I want to remind you of the main rule while trading with the B-Bands and the support/resistance.
And it is one of the two parameters derived from the Bollinger band (the other is %B). Among them, we have the Bollinger band width indicator in Tradingview also, that’s we will discuss in this course. While every strategy has its drawbacks, Bollinger Bands® are among the most useful and commonly used tools in spotlighting extreme short-term security prices. One of the main limitations is that it shouldn’t be used as a standalone tool.
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As with other indicators, Bollinger Bands are not meant to be used as a stand-alone tool. Chartists should combine Bollinger Bands with basic trend analysis and other indicators for confirmation. We know that markets trade erratically on a daily basis even though they are still trading in an uptrend or downtrend.
And we marked the distance between these bands to illustrate the volatility in the stock market. The upper and lower bands are typically two standard deviations from the SMA. On the other hand, the Bollinger Bandwidth is used as a measure of volatility.
Bollinger Bandwidth – Bulge and squeeze
The centerline is typically a simple moving average while the price channels are the standard deviations of the stock being studied. The bands expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction). Bollinger Bands reflect direction with the 20-period SMA and volatility with the upper/lower bands.
From mid-January until early May, Monsanto closed below the lower band at least five times. Notice that the stock did not close above the upper band once during this period. The support break and initial close below the lower band signaled a downtrend. As such, the 10-period Commodity Channel Index (CCI) was used to identify short-term overbought situations. A move back below +100 signals a resumption of the downtrend (red arrows).