We have already learned about the usage of the mother indicator Bollinger Bands. 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 the stock price.
- Rising bandwidth shows a rise in volatility.
The BBW uses all standard features of Bollinger Bands. The default parameters are also the same as that of Bollinger bands. According to John Bollinger (inventor of Bollinger bands), Bollinger %b and Bollinger Bandwidth are two derivatives of BB. All these indicators are now available in standard trading platforms like Zerodha Kite or Upstox Pro.
How to set up BBW on charts?
Bollinger Bandwidth on Zerodha Kite
- You must be logged in to your Zerodha Kite account.
- Select your favorite stock or commodity and open its chart.
- Now go to the Studies section and select Bollinger Bandwidth from the list.
- By default, the BBW indicator is plotted on the field Close, but you can change this field.
- Just like the mother indicator, BBW too uses the 20-day simple moving average and 2 standard deviations which can be changed as per own requirement.
- You can also change the moving average type. We keep it simple, the default value.
Bollinger Bandwidth on Upstox Pro
Exactly in a similar manner, you can add the BBW indicator on the Upstox Pro platform. This indicator is also available in the Upstox Pro Mobile platform. In this platform also you will get the same default settings of the BBW indicator.
Bollinger Bandwidth Trading Strategy
- The first thing that is important is the BBW indicator does not show the trend direction.
- Just like the ADX indicator, it shows whether the market is trending or ranging.
- The BBW indicator mainly also shows the fall and rise in volatility
- Low Bollinger Bandwidth indicator value denotes a tight range or the narrow bands that are also known as the Bollinger Bands Squeeze.
- So once the BBW indicator starts rising it denotes that the bands are expanding again and that can be the start of a new trend.
- You can use the BBW indicator in a combination with other indicators like moving average or SuperTrend.
Detecting the trend and the range
Using a Hull Moving Average
o identify the change in the market condition we can use a Hull Moving Average (HMA) of the Bollinger Bandwidth. Why I use HMA is because it is really smooth and has less whipsaw. Just see the image below.
When the market is in range you can use the oscillators for trading the range. On the other hand, when the market is in trend, we can use trend following indicators to trade the trend.
Using a trend line on the Bollinger Bandwidth indicator
We can also use a trend line on the BBW. Once there is a trend line break, we can guess that a new trending phase will come into the market. We can trade this trend using any trend-following indicators. Watch the image below.
In the image, we can see that once the trend line got broken on the BBW indicator, the market entered a new trending phase. You can also check before this trend line break, the market was in a very tight range.
Trading The BBW indicator with Bollinger Bands
You can trade any markets with only two indicators on the chart. One is the Bollinger Bands and the other is the Bollinger Bandwidth indicator.
- First, identify the trend. You can identify the trend using the slope of the middle band, i.e, the 20-period simple moving average.
- Additionally, you can use a 50-period moving average to identify the larger trend.
- Now once the trend is identified, wait to a very low BBW reading close to 1.
- As an example, check in this scenario, the main trend is up, we will wait for a low BBW reading.
- Once we get a low reading, we will wait for the price to touch the lower Bollinger Bands. That will trigger the buy, price reaching to an extreme with a very tight range.
- From there, we can expect the BBW to start rising and price to bounce back with a strong trend.
The above image shows how a sharp rally started when all the entry criteria met. This is a very effective trading strategy.
To learn more trading strategies using Bollinger Bands and the associate indicators, I suggest the following book: ETF Trading with Bollinger Bands® (Connors Research Trading Strategy Series). In this book too you will get few highly accurate trading systems based on the Bollinger Bands and the associate indicators.
The Bollinger Bandwidth is an associate indicator of the mighty Bollinger Bands indicator. Like the ADX indicator, this indicator also identifies range or trend. A low value of the indicator denotes a rangebound movement. While a high value of the indicator denotes a trending market. This indicator can be used to create highly profitable trading systems. This can be best used with some oscillators as well as trend-following indicators.