Bollinger BandWidth (BBW) is a technical analysis indicator derived from the standard Bollinger Bands indicator. Bollinger Bands are a volatility indicator which creates a band of three lines which are plotted in relation to a security’s price. The Upper and Lower Bands are typically 2 standard deviations above and below the SMA (Middle Line). Bollinger BandWidth serve as a way to quantitatively measure the width between the Upper and Lower Bands. This occurs when volatility falls to a low level, as evidenced by the narrowing bands. The upper and lower bands are based on the standard deviation, which measures volatility.

How to Exploit the Bollinger Band Width in Systematic Trading

The lighter colored boxes represent stocks with relatively narrow BandWidths (see legend below the MarketCarpet). Top stories, top movers, and trade ideas delivered to your inbox every weekday before and after the market closes. Traders may use the data provided by the BBW to supplement their trading strategy in several ways. In simple terms, we would say that 95% of all the price action happens in between the Bollinger Bands®.

What Are Some Limitations to Using Bollinger Bands?

Engaging with Bollinger Bands Bandwidth equips investors with a deeper understanding of market behavior, empowering them to anticipate shifts and pivot swiftly. Enhancing one’s trading arsenal with the acumen to interpret such volatility is both an art and a science, facilitating a mature grasp of the multifaceted nature of market ecosystems. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

First, the Bollinger bandwidth is not a measure of absolute market volatility, but rather a relative measure. That is, it will tell you how volatile the market is relative to its recent history. The Bollinger Bandwidth is the difference between the upper and lower Bollinger Bands. It is a good measure of market volatility and can be used to identify potential trend reversals. When the Bollinger Bandwidth is narrow, it means that the market is not very volatile and may be due for a move.

Meet John Bollinger: The Innovator Behind Bollinger Bands

Our independence from brokers and the companies we introduce, our commitment to maximum transparency, and our extensive experience in financial markets contribute to our ranking criteria. This ensures that we accurately convey facts and events so that investors and traders can read our content with confidence and make informed choices. Forex, binary options, cryptocurrency, and CFD trading on margin involve high risk and are not suitable for all investors and traders. Participating in financial markets involves high risk, which can result in the loss of part or all of your investment. Many traders take a breakout of a band as a continuation signal this is a classic Bollinger Bands indicator tutorial example.

The traders will check if the second rise closes below the upper Bollinger band and only then will they short the asset. Usually, traders hone in when the price breaches the lower band and rebounds for a short while before diving again. 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.

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• For instance, utility stocks generally have lower BandWidth values than technology stocks.
• Bollinger Bands can produce false signals, especially in choppy or sideways markets.
• However, both track the same thing, which is the level of volatility in the market.
• Traders should have a clear and disciplined trading plan that dictates when and how to enter and exit positions.

One must ensure that the strategy is thoroughly tested and optimised, and risk management rules should be applied to control losses. Also, it is observed from the strategy that the cumulative returns is -2.52%. Negative cumulative returns indicate that the strategy, based on the Bollinger Bands signals, has not been profitable during the observed period, and the overall performance has resulted in a loss. For example, you might buy when the price touches the lower band and sell when it touches the upper band. One must understand that the reversal of the price trend can happen due to a variety of factors such as a negative false news announcement over social media and not only because of the bands themselves. These overbought and oversold indications shouldn’t be interpreted as direct buy/sell signals.

• The Bollinger Bands Width is an offshoot of the Bollinger Bands indicator that specifically tracks market volatility by measuring the percentage difference between the upper and lower Bollinger bands.
• Bollinger Bands® are a technical analysis tool that provides a relative definition of high and low.
• Just as touching the upper band signals an increase in volatility, the price reaching the lower band indicates greater volatility in the context of a downward move.
• In this context, standard deviation measures how far prices typically deviate from SMA, the middle band.

Bollinger Bands ® do not lag (as much) because they always change automatically with the price action. Hence, Bollinger Bands are a valuable tool when used thoughtfully and in conjunction with other analysis techniques. Understanding their limitations and applying them within a comprehensive trading plan is essential for effective utilisation.

In this analysis, we will explore how traders can capitalize on momentum trading strategies, mean reversion strategies, and the Bollinger Bands squeeze to drive their investment success. 2) Time frame – The bollinger bandwidth indicator is based on the Bollinger Bands, which are calculated using a 20-day moving average. This means that the signal may not be as timely for shorter-term traders. The typical settings for Bollinger Bands are a 20-period simple moving average (SMA) for the middle band and 2 standard deviations for the upper and lower bands. However, you can change the settings to whatever suits the market you want to trade and the strategy you are using. Using standard deviation and a simple moving average, it allows traders to spot overbought or oversold conditions, band squeezes and breakout opportunities.

Since Bollinger Bands are based on the standard deviation, falling Band Width reflects decreasing volatility and rising Band Width reflects the opposite. To understand what Bollinger Bandwidth is, we need to first look at what Bollinger Bands are. The middle line is the asset’s moving average while the two outer lines are the standard deviations. Besides Bollinger Bands, you can also explore other tools such as the correlation tool, and currency strength tool. By incorporating these technical analysis tools as part of your trading plan, you can improve your trading performance.

What Timeframes Works Best with the Bollinger bands?

Whereas previously in the uptrend, the price was able to reach and trade outside the upper band, during the exhaustion, the price could not continue the trending phase. As you delve into the world of Bollinger Bands and trading, keep these insights in mind to enhance your trading proficiency and navigate the financial markets with confidence. Unlike the strategy discussed above, where you know the direction of the trend, it can be hard to predict which direction the price would go after a period of low volatility. Bollinger Bands looks quite similar to keltner channels, which also uses three bands plotted on the price action. For example, if the price breaks above Bollinger Bands’ upper band to form higher highs, you may be tempted to believe that the existing uptrend is sustainable.

John Bollinger, CFA, CMT, has been a major influence in technical analysis and is best known for developing Bollinger Bands in the 1980s. He is also the founder of Bollinger Capital Management, a money management company, and has been a prominent commentator and analyst on market conditions. Bollinger bandwidth is a technical indicator that can be used to measure the volatility of a security. By using bollinger bandwidth, investors can make better investment decisions by identifying periods of high and low volatility. Bollinger bandwidth can also be used to predict future price movements, as high levels of volatility often coincide with sharp price movements.

At the same time, it is worth noting that the indicator can remain in a squeeze zone for an extended period of time. Like the Average True Range, the indicator tells you whether the market is volatile or not. With this information, you can then move ahead to open trades or anticipate moves. As you see in the video, our coach compares the performance of this strategy, with and without BBW. Note how this strategy is used on a very diverse basket of futures spanning several  different markets (energy, metals, equity indexes, and commodities) on data running from 2010 to 2020. In this video, you’ll see BBW applied to a trend-following strategy, simply buying an asset when its price trend goes up and selling when its price trend goes down.

The interesting thing is that with trading algos, backtesting becomes a lot easier and faster. So, it’s even better to create Bollinger Bands Width strategies for algo trading. The relative strength index (RSI) is one bollinger bands bandwidth of the most popular oscillators in all of trading.