We have already learned about the usage of Bollinger Bands indicator. In this post we will discuss on Bollinger Bandwidth (BBW), which is a technical analysis indicator derived from the standard Bollinger bands. BBW measures the percentage difference between upper and lower bands. The Bollinger band is characterized by the following:
- The bandwidth decreases as the Bollinger band narrows and increases as the bands widen.
- Falling bandwidth indicates a decrease in the volatility of stock price.
- Rising bandwidth shows a rise in volatility.
The BBW uses all standard features of Bollinger Bands. The default parameters are also same as that of Bollinger bands. According to John Bollinger (inventor of Bollinger bands), Bollinger %b and Bollinger Bandwidth are two derivatives of Bollinger bands. Zerodha Kite charts can plot this indicator in no time for traders.
How to set up BBW in Zerodha Kite?
- Go to MarketWatch.
- Choose the stock you are going to trade.
- Right click on the stock and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to Bollinger bandwidth and click on it.
- A small window opens with default parameters of the indicator.
- Once the parameters are selected, the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price.
- By default, BBW indicator uses 20-day simple moving average and 2 standard deviations which can be changed as per own requirement.
BBW in intraday trading –
- The indicator shows price trend and fall and rise in volatility
- The picture above shows State Bank of India (SBIN) stock price movement with respect to BBW.
- The chart shows 1 min. timeframe.
- The strategy shows the price trend. Understanding price trend from this indicator is important before creating a position.
- In 1 minute chart, traders may find many whipsaws which will be eliminated if longer time frames are used and this indicator is used with a combination of other indicators.
Traders can use this indicator to understand the market trend and create trading positions as well. Low Bollinger Bandwidth indicator value denotes tight range as the Bollinger Bands squeeze. So once the BBW indicator starts rising it denotes that the Bollinger Bands are expanding again and that can be the start of a new trend. You can use BBW indicator in combination of other indicators like moving average or SuperTrend.
Partha, an engineer by education, is theoratically actively following the stock and commodity markets since 1990. He is an active trader since 2003. He has received formal education in future and options and quantum analysis. He is presently working on research oriented projects using Python and data analytics.