How-To Use Bollinger Bands Width Cross

23 Okt 2023

Today, this article will introduce the last member of the Bollinger Bands trio - **Bollinger Bands Width (BBW)**. This indicator is derived from the famous Bollinger Bands and is used to measure price volatility and identify trading signals.

First, let's take a look at what Bollinger Bands are. It consists of three lines that are associated with the price of a security. The middle line is usually a 20-day simple moving average (SMA), while the upper and lower bands are two standard deviations above and below the middle band. The Bollinger Bands Width is a method used to measure the width between the upper and lower bands.

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Bollinger Bands Width = (Upper Band - Lower Band) / Middle Band

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So how do we calculate BBW? It's simple! Just subtract the lower band from the upper band and divide it by the middle band to get the BBW value.

However, it's important to note that we cannot simply determine whether it is in a narrow or wide state based on the BBW value alone. Different tools or securities may have different definitions of narrowness, and it can also change over different time ranges. Therefore, to accurately assess the importance of band narrowing, we need to analyze the past BBW fluctuations and price performance together.

Next, let's talk about one of the most famous theories about Bollinger Bands - the "squeeze". The squeeze setup consists of two steps: first, a period of low volatility where the bands narrow and prices move relatively horizontally; then, an increase in volatility where prices break above the upper band or below the lower band, signaling the start of a new trend.

In a squeeze setup during a bull market, BBW decreases, and when prices break above the upper band, a new uptrend begins. In a squeeze setup during a bear market, BBW also decreases, and when prices fall below the lower band, a new downtrend begins.

To summarize, Bollinger Bands Width (BBW) is a very useful technical analysis tool that performs well in identifying squeezes. However, traders should use it with caution! Sometimes, even though a squeeze setup occurs, a strong market trend may not actually emerge. Therefore, determining whether a breakout is valid still requires traders to decide for themselves.

Finally, let's introduce some parameters and options: Length represents the time period used for calculating the base SMA, with a default of 20 days; Source represents the determination of the data used for each candlestick in the calculation, with a default of the closing price; Standard Deviation represents the number of standard deviations away from the SMA that the upper and lower bands are, with a default of 2.