Bollinger Bands Width: A Trader’s Guide
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Last updated
Last updated
Bollinger Bands Width (BBW) is a technical analysis indicator used by traders to measure the volatility of an asset's price. Created by John Bollinger in the 1980s, Bollinger Bands consist of three lines: the middle line (a simple moving average), and an upper and lower band that are standard deviations away from the middle line. Bollinger Bands Width is the difference between the upper and lower bands, providing a clear picture of the price's volatility.
The Squeeze: The squeeze is a period of low volatility identified by a narrowing of the Bollinger Bands (low BBW value). It often precedes significant price movements, as the market tends to alternate between periods of low and high volatility. Traders may look for potential breakouts or breakdowns when the squeeze occurs.
Expansion: An expansion is a period of high volatility characterized by a widening of the Bollinger Bands (high BBW value). During expansions, traders can implement strategies that capitalize on volatile price movements, such as short-term trading or breakout trading.
Trend identification: The direction of the BBW can help traders identify the prevailing trend. A rising BBW indicates an increase in volatility and possibly the beginning of a new trend. Conversely, a falling BBW suggests decreasing volatility and potential trend exhaustion.
Using BBW in conjunction with other technical analysis tools can increase the accuracy and effectiveness of trading decisions. For example:
Volume: Combining BBW with volume analysis can help confirm price breakouts or breakdowns. An increase in volume during a squeeze or expansion may suggest stronger conviction behind the price movement.
Momentum indicators: Indicators such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) can be used alongside BBW to identify potential reversals or trend continuation.
Chart patterns: Chart patterns, such as triangles or flags, can complement BBW analysis by providing additional insights into potential price movements.
On Finteria binary options trading platform, Williams Alligator indicator can be used to confirm the market’s trends and to spot potential sell/buy breakouts. See below a quick rundown of this indicator on the platform and an exemplary analysis of the market with this tool.
Click on the ticker’s icon to change the data layout that is more suitable for technical analysis:
Pick the f(x) button to do the technical analysis indicators:
Once clicked, a menu bar will appear with all indicators available on TradingView:
BBW shows the percentage difference between the upper band and the lower band. On the screenshot below, 5% of difference at the moment on February 8, shows low volatility, a so-called “squeeze” of the asset’s market. Common theory tells that when the market is squeezed, there is a high chance of widening of the market cap leading to a considerable price bounce, which can be seen afterward: this way, the BTC/USD price went up by 20%, from 22`000 USD to 27`000.
In conclusion, Bollinger Bands Width is a useful indicator for assessing an asset's price volatility. By incorporating BBW into their trading strategy and using it alongside other technical analysis tools, traders can gain a better understanding of market dynamics and make more informed decisions. However, it is essential to remember that no indicator is foolproof, and traders should always manage risk and employ proper money management techniques.
