The Bollinger Bandwidth indicator can present invaluable indicators for technical merchants, and when mixed with different technical indicators and worth motion methods, offers merchants perception into each volatility and potential reversals within the foreign exchange market.
Earlier than studying additional, make sure to perceive the fundamentals of the Bollinger Band®
This text explores:
What’s the Bollinger Bandwidth Technique?How does the Bollinger Bandwidth indicator work? Methods to calculate Bollinger BandwidthMaking use of the Bollinger Bandwidth Technique: Prime Ideas Benefits and Limitations of the Bollinger Bandwidth technique
What’s the Bollinger Bandwidth Technique?
The Bollinger Bandwidth technique makes use of the Bollinger bandwidth indicator to measure the distinction in proportion between the higher and decrease bands of the standard Bollinger Band® indicator. On most charting platforms, the Bollinger Bandwidth indicator is represented beneath the first chart as an oscillator sort format (see picture beneath).
How does the Bollinger Bandwidth indicator work?
The Bollinger Bandwidth indicator illustrates durations of various volatility relative to the market worth motion. The chart beneath exhibits how volatility falls when the Bollinger Band® width contracts and rises when the width expands. After durations of consolidation (low volatility), it’s usually famous that worth tends transfer in an asserted vogue both up or down. Opposite to this, when the Bollinger Bandwidth indicator will increase to relative highs (excessive volatility), this usually indicators a reversal in present development.
Methods to calculate Bollinger Bandwidth
The Bandwidth formulation is:
Bandwidth = (Higher Bollinger Band® – Decrease Bollinger Band®)/Center Bollinger Band®
Making use of the Bollinger Bandwidth Technique: Prime Ideas
Merchants can commerce with the Bollinger Bandwidth indicator in a number of alternative ways however two of the commonest methods to commerce with this indicator contain breakout and reversal actions.
Bollinger Bandwidth low volatility technique
The picture above represents a each day EUR/USD chart. The highlighted portion on the chart and Bollinger Bandwidth indicator signifies low volatility and a interval of consolidation (sideways motion). Merchants see this tightening of the Bollinger Band® as a sign that an abrupt transfer is more likely to happen quickly after.
Sadly, the Bollinger Bandwidth indicator doesn’t provide any additional commerce help which is why merchants depend on different trading methods to substantiate entry and exit ranges. This may be taken from worth motion, Bollinger Band® and different technical strategies.
Bollinger Bandwidth reversal technique
Wanting on the enhance in volatility or increased Bollinger Bandwidth worth on the USD/JPY each day chart, it exhibits USD/JPY reaching new lows outlined by the sq. bins. This parabolic motion in worth and rising volatility does trace at a possible development reversal (to the upside on this case).
This instance additionally gives additional supporting proof with the lengthy wick candle formation, indicating a rejection of the brand new low by bulls. As talked about beforehand, the Bollinger Bandwidth indicator doesn’t specify entry/exit ranges so different instruments have to be utilized in conjunction. Fibonacci degrees are sometimes used to find out theses entry/exit ranges in addition to worth motion development strains to ascertain help and resistance factors.
Benefits and Limitations of the Bollinger Bandwidth technique
Simple to entry and perceive
Requires use of supporting technical instruments and indicators
Identifies sturdy potential actions in worth (excessive risk-reward ratios)
Utilised in several circumstances which will be tough for novice merchants to differentiate between the respective strategies