Indicators that offer insight into volatility have much to add to chart analysis and the anticipation of price behavior. Bollinger Bands is one of the most well-known indicators of this type and is largely used worldwide.
There are some variations of the indicator such as the Bollinger Band Width which is the subject of this article. It provides important information on the dynamics of price and volatility. Simply put, the Band Width is a normalized measure of the spread of the superior and inferior lines divided by a moving average:
- Downward Band Width indicates volatility to decrease.
- Upward Band Width indicates volatility increase.
Bollinger Band Width is available in all versions of Vector Platforms.
To add the indicator right-click on the chart and left-click on “Add Indicator”, then type “Bollinger Band Width”.
When volatility falls to lower levels the Bollinger Bands narrow. Intervals of low volatility can forecast a significant advance or decline and the main application of the Band Width indicator is based on this concept. It gives the trader the necessary time to enter the trade before a subsequent breakout.
The squeeze is generally followed by a large increase in volatility and it´s quite common for important supports and resistances to be broken, often without pullbacks. It can be identified on the Band Width when the line reaches the lower levels.
Note
Despite its significant contribution to chart analysis, the Band Width does not indicate the direction prices will go once they break out. The associated use of other methods and indicators, such as the Relative Strength Index (RSI) and On-Balance-Volume (OBV) for example, is necessary to determine the breakout direction.
Analyzing historical data can also provide important information since assets behave differently in relation to volatility and other variables.
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