As John Bollinger acknowledged, “tags of the bands are just that, tags, not signals.” A tag (or touch) of the upper Bollinger Band® is not in and of itself a sell signal. A tag of the lower Bollinger Band® is not in and of itself bollinger bands bandwidth a buy signal. One of the more common calculations uses a 20-day simple moving average (SMA) for the middle band. The upper band is calculated by taking the middle band and adding twice the daily standard deviation to that amount.
When stock prices continually touch the upper Bollinger Band®, the prices are thought to be overbought; conversely, when they continually touch the lower band, prices are thought to be oversold, triggering a buy signal. Technical analysis is a trading strategy that analyzes statistical trends to identify trading opportunities. Note how, in the following chart, the trader is able to stay with the move for most of the uptrend, exiting only when price starts to consolidate at the top of the new range. Using the bands as overbought/oversold indicators relies on the concept of mean reversion of the price. Mean reversion assumes that, if the price deviates substantially from the mean or average, it eventually reverts back to the mean price.
Bollinger Band Width Indicator
Traders see this tightening of the Bollinger Band® as an indication that an abrupt move is likely to occur soon after. Chart 5 shows Honeywell (HON) with an extended trading range in the area. There was a move to the upper band in May, but no breakout for a signal. Instead, HON clearly broke below the lower band to trigger a bearish signal in June 2007.
- A squeeze occurs when the price has been moving aggressively then starts moving sideways in a tight consolidation.
- Bollinger Bands %B indicator is derived from the simple Bollinger Band indicator.
- The Bollinger Band Width (BBW) indicator is a technical analysis tool derived from the Bollinger band.
The index is not one of the more popular indicators, but that does not mean it lacks accuracy. In all the three instances price fell 5.6%, 3.6% and 7.6% from the short term market tops when the indicator dipped below 2%. The difference is then divided by the value of the middle band which is the 20-period SMA. The Squeeze is triggered soon after volatility falls sharply, often hitting historical lows. Visually, you will be able to see the BBW indicator line falling as well as the value dropping as shown in the image below. The Bollinger Bands Width will increase during a period of high volatility.
How do you calculate the width of the Bollinger bands?
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As we know that volatility is not a trend and by itself, volatility cannot provide trading signals. However, being an important metric, it can provide signals of optimal entry and exit points when it is used in conjunction with trend direction and trading volume. 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.
The bands are used to generate signals for securities that are oversold or overbought. The bands are composed of different lines that are plotted on a chart, including the moving average, an upper band, and a lower band. Bollinger Bands® is not a standalone trading system but just one indicator designed to provide traders with information regarding price volatility. John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals and indicators based on different types of data.
Things to Consider with the Bollinger Band Width
However, Bollinger Bands® don’t always give accurate buy and sell signals. During a strong trend, for example, the trader runs the risk of placing trades on the wrong side of the move because the indicator can flash overbought or oversold signals too soon. Bollinger Bands® can be a useful tool for traders for assessing the relative level of over- or under-sold position of a stock and provides them with insight on when to enter and exit a position. Certain aspects of Bollinger Bands®, such as the squeeze, work well for currency trading. Buying when stock prices cross below the lower Bollinger Band® often helps traders take advantage of oversold conditions and profit when the stock price moves back up toward the center moving-average line.
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The Bollinger Band Width (BBW) indicator is a technical analysis tool derived from the Bollinger band. BBW is actually the width between the upper and lower Bollinger bands divided by the middle band. Technical analysts can easily employ the Bollinger Band Width indicator to visualize consolidation before price fluctuations or high volatility periods. It depends on the same parameters used by the Bollinger band, however, it combines those separate three lines into one line. In simple words, it calculates the difference between the lower and upper bands. Market volatility, volume and system availability may delay account access and trade executions.
You can see that for the most part, the price action was touching the lower band and the stock price fell from the $60 level in the dead of winter to its March position of around $10. In a couple of instances, the price action cut through the centerline (March to May and again in July and August), but for many traders, this was certainly not a buy signal as the trend wasn’t broken. We know that markets trade erratically on a daily basis even though they are still trading in an uptrend or downtrend.
The BB indicator is made up of three lines (bands) as shown in the image below. 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.
How to calculate Bollinger Bandwidth
For a quick refresher, Bollinger Bands encapsulate price and are two standard deviations from the 20-period simple moving average (SMA). This line marks 8, which is deemed relatively low based on the historical range. The BandWidth indicator alerted traders to be ready for a move in mid-August.
After a Squeeze, a price surge and subsequent band break signal the start of a new move. A new advance starts with a Squeeze and subsequent break above the upper band. A new decline starts with a Squeeze and subsequent break below the lower band.