Bollinger Bandwidth Indicator - 3 Trading Strategies
In this clause, I am going to cover some basic trading techniques you can use with the Bollinger Bandwidth indicator. Before we plunk into the strategies, let's first discuss the indicant.
Bollinger Bandwidth Overview
The Bollinger Bandwidth was first introduced by John Bollinger in the book, Bollinger along Bollinger Bands.
The indicant measures the pct remainder betwixt the upper and lower Bollinger Bands. Most graph engines plot the index as an oscillator beneath the price chart.
For a quick refresher course, Bollinger Bands capsulize price and are two standard deviations from the 20-stop simple touring average (SMA).
How to Calculate the Bollinger Bandwidth
Number 1, subtract the values of the lower band from the upper band. The difference is and so divided aside the value of the middle band which is the 20-period SMA.
The result is a normalized bandwidth value.
Bollinger Bandwidth Chart Example
Bollinger bandwidth index with Bollinger bands on SPY ETF Graph
In the above graph, when the distance between the two outer Bollinger bands contract, the Bandwidth indicator falls and when the upper and the lower Bollinger Bands expands, the Bandwidth index rises.
The Bollinger bandwidth provides a optical of price consolidation (low bandwidth values) and periods of volatility (high bandwidth values).
As a trader, you can soar upwards out on your chart to puzzle out a sense of the excitableness inside context to preceding moves.
Interpretation Bollinger Bandwidth Indicator Signals
When the upper and lower bands are far apart, it indicates the current trend is nearing an end.
Conversely, when the upper and lower Bollinger bands tighten, an impulsive move is likely right around the corner.
Bollinger bandwidth and grocery volatility
The above chart shows how lows along the Bollinger bandwidth impressive a potential strong move in the markets. In the first instance, the degraded period of consolidation was starred by a solid breakout in prices.
In the second scenario, the low bandwidth reading known as the short-full term top and subsequent Leontyne Price selloff.
Lastly, the third example shows triggered a tease.
Bollinger Bandwidth Does Non Forecast Grocery Centering
As you can encounter, the low points do non predict which way the marketplace is going to break. You will need to use other analysis techniques to identify your edge.
3 Bollinger Bandwidth Trading Strategies
The most common direction to trade with the Bollinger bandwidth indicator is breakouts. As antecedently discussed, low periods of volatility forgo high periods of excitableness.
#1 – Bollinger Bandwidth and the Broad Market
According to Privy Bollinger, the fall in the Bollinger Bandwidth indicator below 2% Beaver State 0.02 has light-emitting diode to big moves in the S&P500 index.
Bollinger bandwidth indicator and the 2% threshold
In every last the three instances price fell 5.6%, 3.6% and 7.6% from the short term market tops when the indicator dipped below 2%.
To earnings along this apparatus, you can buy futures contracts or an ETF that mirrors the broad market. To determine your potentiality net potential difference, review prior rallies to limit the tight.
#2 – Double Bottom Patronage Signals
In the following chart, we have the SPDR S&adenosine monophosphate;P500 Stag ETF intraday chart. Here we throne see that while prices posted a low it was marked by a abject in the Bollinger bandwidth.
Bollinger bandwidth and damage trends
This low was besides a psychometric test of a prior low with the candle completely inaccurate of the Bollinger band.
So, you have multiple signals confirming the index is oversold. While we only cover double bottoms, you can apply the Bollinger bandwidth indicator to validate other chart patterns.
#3 – Major Trend Reversals
In the below chart of the SPDR 500 the grocery position in a major low in the first red corner. In this setup, you want to wait for volume and Leontyne Price to go parabolic to the downside.
If you mark the volatility easing the initial push could be enough for the security to climb the wall of vexation. You can jump onboard the trend with a close stop below the most past contemptible.
You will wishing to apply trendlines or other indicator to follow toll higher. When you are purchasing securities with such high excitability on a countertrend move, you have to hold on to your position a small-scale thirster, so the hazard-reward full treatmen out on the swap.
Bollinger bandwidth index at extremes
Next up, the market formed a top with another extreme reading of the Bollinger bandwidth indicator.
Here you tail go by unretentive with a stoppag above the most recent high. You lavatory trail the position using trendlines or Price action.
How Canful Tradingsim Help?
If you are thinking about trading with the Bollinger bandwidth indicator, you can do so inside Tradingsim. You can apply placing trades and identify which strategy works best with your trading style.
To determine additional Bollinger bandwidth strategies, learn from the master himself – John Bollinger happening his web site.
Good Luck!
POPULAR LESSONS IN THE COURSE: Oscillator Indicators
Source: https://tradingsim.com/blog/use-bollinger-band-width-indicator-call-major-tops-bottoms/
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