How to Apply the Bollinger Bandwidth Strategy

For example, a high BBW indicates a high level of volatility, while a narrow one shows that prices remain relatively close to the moving average. This indicator shows the bollinger bands against the price all expressed in percentage of the mean BB value. With one sight you can see the amplitude of BB and the variation of the price, evaluate a reenter of the price in the BB. The relative price is visualized as a candle with open/high/low/close value exspressed as percentage deviation from the BB mean

  • The BB indicator is made up of three lines (bands) as shown in the image below.
  • First, you need to find a stock that is stuck in a trading range.
  • Since trading is a personal journey, we’ve created this strategy/profile matrix to help you uncover which might work best for you.
  • The ability to hold above the lower band on the test shows less weakness on the last decline.

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.

As Bollinger puts it, moves that touch or exceed the bands are not signals, but rather “tags”. On the face of it, a move to the upper band shows strength, while a sharp move to the lower band shows weakness. It takes strength to reach overbought levels and overbought conditions can extend in a strong uptrend. Similarly, prices can “walk the band” with numerous touches during a strong uptrend. The upper band is 2 standard deviations above the 20-period simple moving average.

Bollinger Bands

While technical analysis can identify things unseen on a ticker, it can also aid in our demise as traders. A major trend reversal may happen when volatility surges, which might represent a good time to establish a position. On the other hand, if the stock is experiencing bollinger bands bandwidth volatility in the counter trend, it may be prudent to further evaluate the indicators before considering taking action. When the price surges through the upper band, it indicates a price increase, and if it drops through the lower band, it indicates a decline.

Additionally, the MACD formed a bearish divergence and moved below its signal line for confirmation. They can be used to identify M-Tops and W-Bottoms or to determine the trend’s strength. Signals based on the distance between the upper and lower band, including the popular Bollinger Band Squeeze, are identified using the related Bollinger BandWidth indicator.

He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The highlighted portion on the chart and Bollinger Bandwidth indicator signifies low volatility and a period of consolidation (sideways movement). Traders see this tightening of the Bollinger Band® as an indication that an abrupt move is likely to occur soon after. Traders can trade with the Bollinger Bandwidth indicator in several different ways but two of the most common ways to trade with this indicator involve breakout and reversal movements. Yes, but it’s crucial to note that securities with lower volatility will naturally have lower BandWidth values than those with higher volatility. For instance, utility stocks generally have lower BandWidth values than technology stocks.

Things to Consider with the Bollinger Band Width

When calculating BandWidth, the first step is to subtract the value of the lower band from the value of the upper band. This difference is then divided by the middle band, which normalizes the value. This normalized Bandwidth can then be compared across different timeframes or with the BandWidth values for other securities. The Donchian Channel indicator is an intraday trend following indicator that allows you to identify trends. A step by step guide to help beginner and profitable traders have a full overview of all the important skills (and what to learn next 😉) to reach profitable trading ASAP. Bollinger Bands Width is also prone to certain limitations as is the case with most of the trading and analysis tools.

Such techniques usually require the sample to be independent and identically distributed, which is not the case for a time series like security prices. Bollinger Bands are a type of price envelope developed by John Bollinger. (Price envelopes define upper and lower price range levels.) Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price.

Using Bollinger Bands

In fact, dips below the 20-day SMA sometimes provide buying opportunities before the next tag of the upper band. Traders should understand that standard settings will not suit all strategies when trading with Bollinger Bands. For example, long-term position traders may prefer to use a more significant number of periods and a higher standard deviation.

Using with MarketCarpets

Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price. John Bollinger developed the Bollinger band indicator which is based on the volatility as standard deviation. Bollinger Band calculates deviation as the square root of the variance. Basically, the indicator is stationed around a moving average usually at a 20 day period. The addition of the moving average twice the standard deviation gives the upper Bollinger band. On the other hand, subtraction of the standard deviation twice the moving average gives the lower Bollinger band.

I’m not sure if this is because there aren’t many people interested or if other traders stay out of the bands arena because John is so actively evangelizing his own indicator. I would sell every time the price hit the top bands and buy when it hit the lower band. Therefore, the more signals on the chart, the more likely I am to act in response to a signal. That doesn’t mean they can’t work for you, but my trading style requires me to use a clean chart. If you had just looked at the bands, it would be nearly impossible to know that a pending move was coming. You would have no way of knowing that .0087 was a level that existed, let alone a level that could trigger such a large price movement.

Trading Strategies Using the Relative Vigor Index

Based on reading these three requirements you can imagine this does not happen very often in the market, but when it does, it’s powerful. We need to have an edge when trading a Bollinger Band squeeze because these setups can head-fake even the best of us. Using the same chart from above, we can see that the rally off the first low created a near term overbought scenario.

How to Use Bollinger Band Width in Systematic Trading

Instead of taking the time to practice, I was determined to turn a profit immediately and was testing out different ideas. The stock could just be starting its glorious move to the heavens, but I am unable to mentally handle the move because all I can think about is the stock needs to come back inside of the bands. You would need a trained eye and have a good handle with market breadth indicators to know that this was the start of something real.

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