Introduction

Bollinger Bands measure volatility by placing trading bands around a moving average. These bands are charted usually two standard deviations away from the average, so as the average changes, the value of two standard deviations also changes. This value is the Bollinger Band Width, which represents the expanding and contracting of the bands based on recent volatility.

During a period of rising price volatility, the distance between the two bands will widen (BB Width will increase). Conversely, during a period of low market volatility, the distance between the two bands will contract (BB Width will decrease).

There is a tendency for bands to alternate between expansion and contraction. When the bands are unusually far apart, that is often a sign that the current trend may be ending. When the distance between the two bands has narrowed too far, that is often a sign that a market may be about to initiate a new trend.

This chart from Dell shows Bollinger Band Width for a 20-day moving average using 4 standard deviations. It is easily seen how a high BB Width often indicates a slowing trend (red lines), and how a low BB Width often indicates a forming trend (green line).

Bollinger Band Width and SharpCharts

With SharpCharts, you can plot the Bollinger Band Width indicator using an n-period simple moving average and any multiple of standard deviations by entering the simple moving average-period setting and standard deviation number into the Parameters text box using the format "SMA-period,Std dev." You can also display it above, below, or behind the price plot window. The Bollinger Band Width's default settings, of a 20-period simple moving average and 2 Standard Deviations, are illustrated above. (stockCharts.com)

0 comments:

Post a Comment