Derived from John Bollinger's Bollinger Bands which are basically the high and low moving averages (Usually 20 day), Bollinger Band Width measure the percentage difference between the upper and lower Bollinger Bands or as we like to say: Bollies.
As we are measuring the high to low movement of the stock using this indicator, I'm sure you can guess that we are looking to establish the volatility rather than the price direction or momentum of the underlining stock.
When the value is low we should be seeing consolidation. A high value should correspond with large fluctuations in price.
Bollinger BandWidth is best known for identifying The Squeeze. This occurs when volatility falls to a very low level, as evidenced by the narrowing bands. 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. 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.
As with all other indicators, don't just rely on the defaults, adjust your indicators to suit the stock you are looking at and your trading style.
Typically shorter look backs (lower #'s on your indicators) give you quicker signals which is good for aggressive traders, while longer look backs (higher #'s on your indicators) give slower but more reliable signals for traders who are more conservative.
As we always say: "Don't use your hard earned cash to find out what kind of trader you are, use a virtual account for that."
Links for free virtual trading sites can be found on our Resources page:
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