The Bollinger Bands indicator enables a trader to monitor a security’s volatility over time. It appears as two lines (“bands”) on your candlestick chart, one above most of the price bars and one below most of them. The optional “third band” is (conventionally) the 20-day simple moving average. Bollinger’s bands show up (again, conventionally) two standard deviations above and below the simple moving average.
This is in contrast to an older indicator, the Donchian channel. Instead of standard deviations about the simple moving average, a Donchian channel’s bands reflect the highest high and the lowest low in the last n-period (also usually 20 days). This is good for seeing the upper and lower limits of recent price action, but it doesn’t give a trader much of a read on a security’s true measure of volatility.
When volatility is low, however, Bollinger’s bands get closer together; when it’s high, they move apart. We call long periods of narrow bandwidth Bollinger squeezes and brief moments of extreme volatility Bollinger bulges. These two phenomena are important because, in the words of John Bollinger himself, “A squeeze is where trends are born and a bulge is where trends go to die.”
Bollinger Bands’ Width
Sometimes, it’s helpful to see Bollinger’s actual bands. For example, when a price touches or crosses one of the bands, it may be about to revert to the simple moving average. (Try out indicators on Tradingview.com)
But other times, you just want to know what “Bollinger’s bandwidth” is. That is, how far apart the bands are. In these times, it can be easier to just enable the Bollinger Bands’ Width (“BBW”) oscillator. This indicator shows up at the bottom of your display as a simple line chart. If the line is going up, the security is getting more volatile. If it’s going down, it’s getting less volatile.
Bollinger Bands Width (BBW) Indicator | Indicator Series Click To TweetBollinger’s Discovery
As recently as the 1980s, it was common “knowledge” that the stocks of some companies (mostly young ones) were volatile and the stocks of other companies (mostly mature ones) weren’t. That is, it was understood that a single ticker’s volatility basically was never going to change except over the long-term lifecycle of its underlying business. John Bollinger invented his indicator when he realized that this assumption was patently false:
“One day I copied a volatility formula down a column of data and noticed that volatility was changing over time. Seeing that, I wondered if volatility couldn’t be used to set the width of trading bands. That idea may seem obvious now, but at the time it was a leap of faith.“
Today, Bollinger’s Bands and BBW are two of the most intuitive, popular technical indicators in use. They have helped untold numbers of traders open their trades closer to the beginnings of dramatic price movements and close them nearer to the ends of those movements.
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