Bollinger Bands (BB) is one of the world’s most popular technical analysis indicators. Being a volatility indicator, Bollinger Bands reflect the dynamic range of price movement. The greater the distance between the lines, the higher the volatility. Bollinger Bands can be used as a supportive tool that helps to pinpoint the beginning and the end of the prevailing trend. All in all, it is a indicator that a lot of traders have added to their trading setup. There is, however, one disadvantage to Bollinger Bands, and it is the amount of space they take when applied to the price chart. As an indicator that is plotted directly on the price chart, it doesn’t go well with other indicators that require a lot of space, e. g. Fractals, Alligator or Moving Averages. Turns out, there is one indicator that does all of the above but in a more elegant and concise manner. Meet Bollinger Bands Width.
Bollinger Bands Width (BBW) is a technical analysis tool that is derived from Bollinger Bands. BB Width takes the information that regular Bollinger Bands represent as three separate lines and combines it into one line. Put shortly, this tool calculates the distance between the upper and the lower bands. And here is how to make it a part of your trading system.
How to use in trading?
Bollinger Band Width works as an oscillator. When the volatility is high, the distance between the upper and the lower Bollinger bands goes up, and so does the Bollinger Bands Width. When the market is flat, and the distance between the bands decreases, the indicator will also go down.
Volatility is not the trend, and on its own high/low volatility doesn’t provide buying/selling signals. However, it is an important metric that, along with the trend direction and trading volume, can help you determine optimal entry and exit points.
Periods of high volatility intermingle with periods of relatively low volatility. The higher the volatility, the higher the potential upside but also the risk. The lower the volatility, the lower the
potential upside and also the risk. You can, therefore, determine the riskiness of the deal you are about to enter by using this indicator. Keep this in mind so that you can adjust the risk-return ratio in accordance with your trading style.
Bollinger Bands Width is good at determining market volatility, and that’s it. When it comes to trend direction and other metrics, it is worth using different indicators. Trend-following and volume indicators can become a good addition.
Limitations
Unlike regular Bollinger Bands, Bollinger Bands Width comes as a single line (instead of three separate lines). More than that, it is placed below the price chart in a separate window. It is, therefore, cannot be used as a dynamic support and resistance level, which is commonly the case for BB.
One more limitation, that is not unique to Bollinger Bands Width, but is rather a common place for all technical analysis tools is its inability to provide accurate results 100% of the time. As any other indicator, BBW will from time to time send false signals.
How to set up?
Setting up the indicators is easy:
1. Click on the ‘Indicators’ button in the bottom left corner of the screen,
2. Go to the ‘Other’ tab,
3. Find Bollinger Bands Width in the list of available indicators,
4. Click ‘Apply’ without changing the setting.
The indicator is ready to use!
Now, when you know how to set up and use Bollinger Bands Width in trading, you can proceed to the platform and give it a try. Find out yourself whether it suits your trading style!
