Saturday, August 3, 2013

Bollinger Bandwidth: Rare Volatility Indicator Helps Spot Price Breakouts

Bollinger Bandwidth is one of the few technical indicators that measures volatility.

Most indicators use price and attempt to identify trend changes. Bollinger Bandwidth measures how strong the recent trend is. It does not offer any information about whether prices will go up or down in the future. Instead the indicator highlights periods of high or low volatility. Traders generally prefer high volatility because fast price moves can result in fast profits.

This technical indicator measures the distance between the upper and lower Bollinger Bands. The Bands contract and expand with volatility. Bollinger Bandwidth quantifies the volatility and can be added to the chart to help spot when big price moves are likely to occur. Volatility tends to move in a cyclical pattern, and big price moves often follow periods of low volatility.

Bollinger Bandwidth is calculated by taking the difference between the upper Band and the lower Band and dividing that difference by the moving average of the closing prices (i.e., the middle Band). The indicator will always be between 0 and 100, with low values corresponding to low volatility and high values corresponding to high volatility. It can be used in any time frame.  (more)

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