Bollinger BandWidth 22 8 2017

BOLLINGER BANDS
Bollinger Bands answer a question: Are prices high or low on a relative basis? By definition price is high at the upper band and price is low at the lower
band. That bit of information is incredibly valuable. It is even more powerful if combined with other tools such as other indicators for confirmation. Learn
how to use this powerful tool in the Bollinger Band Knowledge section.
ohn Bollinger answers "What are Bollinger Bands?"
Bollinger Bands are a technical analysis tool, specifically they are a type of trading band or envelope. Trading bands and envelopes serve the same
purpose, they provide relative definitions of high and low that can be used to create rigorous trading approaches, in pattern
recognition, and for much more. Bands are usually thought of as employing a measure of central tendency as a base such as a moving average,
whereas envelopes encompass the price structure without a clearly defined central focus, perhaps by reference to highs and lows, or via cyclic
analysis. We'll use the term trading bands to refer to any set of curves that market technicians use to define high or low on a relative basis.
The earliest example of trading bands that I have been able to uncover comes from Wilfrid Ledoux in 1960. He used curves connecting the monthly
highs and lows of the Dow Jones Industrial Average as a long-term market-timing tool. After Ledoux the exact sequence of trading band development
gets foggy. In 1960 Chester Keltner proposed a trading system, The 10-Day Moving Average Rule, which later became Keltner bands in the hands of
market technicians whose names we do not know. Next comes the work of J. M. Hurst who used cycles to draw envelopes around the price structure.
Hurst's work was so elegant that it became a sort of grail with many trying to replicate it, but few succeeding. In the early '70s percentage bands
became very popular, though we have no idea who created them. They were simply a moving average shifted up and down by a user-specified
percent. Percentage bands had the decided advantage of being easy to deploy by hand. At any given time a 7% band consists of a base moving
average, an upper curve at 107% of the base and a lower curve at 93% of the base. (Arthur Merrill suggested multiply and dividing by one plus the
desired percentage.) When I started using trading bands percentage bands were the most popular bands by far. Along the way we got another fine
example of envelopes, Donchian bands, which consist of the highest high and lowest low of the immediately prior n-days. Those are the main types of
band/envelopes that I know of. Over the years there have been many variations on those ideas, some of which are still in use. Today the most popular
approaches to trading bands are Donchian, Keltner, Percentage and, of course, Bollinger Bands.
Percentage bands are fixed, they do not adapt to changing market conditions; Donchian bands use recent highs and lows and Keltner bands use
Average True Range as adaptive mechanisms. Bollinger Bands use standard deviation to adapt to changing market conditions and thereby hangs a
tale. When I became active in the markets on a full time basis in 1980 I was mainly interested in options and technical analysis. Information on both
BOLLINGER BANDS
was hard to obtain in those days but I persisted; with the help of an early microcomputer I was able to make some progress. At the time we used
percentage bands and compared price action within the bands to the action of supply/demand tools like David Bostian's Intraday Intensity. A touch of
the upper band by price that was not confirmed by strength in the oscillator was a sell setup and a similarly unconfirmed tag of the lower band was a
buy setup. The problem with that approach was that percentage bands needed to be adjusted over time to keep them germane to the price structure
and the adjustment process let emotions into the analytical process. If you were bullish, you had a natural tendency to draw the bands so they
presented a bullish picture, if you were bearish the natural result was a picture with a bearish bias. This was clearly a problem. We tried reset rules like
lookbacks with some success, but what we really needed was an adaptive mechanism. I was trading options at the time and had built some volatility
models in an early spreadsheet program called SuperCalc. One day I copied a volatility formula down a column of data and noticed that volatility was
changing over time. Seeing that, I wondered if volatility couldn't be used to set the width of trading bands. That idea may seem obvious now, but at the
time it was a leap of faith. At that time volatility was thought to be a static quantity, a property of a security, and that if it changed at all, it did so only in a
very long-term sense, over the life of a company for example. Today we know the volatility is a dynamic quantity, indeed very dynamic.
After some experimentation I settled on the formulation we know today, an n period moving average with bands drawn above and below at intervals
determined by a multiple of standard deviation (We use the population calculation for standard deviation). The defaults today are the same as they
were 35 years ago, 20 periods for the moving average with the bands set at plus and minus two standard deviations of the same data used for the
average. But they weren't Bollinger Bands yet, that would come later when Bill Griffeth, an on-air host for the Financial News Network, asked me what
I called my bands on air. I had presented a chart showing an unconfirmed tag of my upper band and explained that the first down day would generate a
sell signal. Bill then asked me what I called those lines around the price structure, a question that I was totally unprepared for, so I blurted out the
alliteratively obvious choice: Bollinger Bands.
So what are Bollinger Bands? They are curves drawn in and around the price structure usually consisting of a moving average (the middle band), an
upper band, and a lower band that answer the question as to whether prices are high or low on a relative basis. Bollinger Bands work best when the
middle band is chosen to reflect the intermediate-term trend, so that trend information is combined with relative price level data.
BOLLINGER BANDS
Soon the Bollinger Bands had company, I created %b, an indicator that depicted where price was in relation to the bands, and then I added BandWidth
to depict how wide the bands were as a function of the middle band. For many years that was the state of the art: Bollinger Bands, %b and BandWidth.
Here are a couple of practical examples of the usage of Bollinger Bands and the classic Bollinger Band tools along with a volume indicator, Intraday
Intensity:
BOLLINGER BANDS
BOLLINGER BANDS
Chart 1: On 20 July prices tagged the upper Bollinger Band while 21-day Intraday Intensity was deep in negative territory
setting up a sell alert. The first down day was the sell signal and entry. The red triangle is a negative PowerShift
Chart 2 : A perfect W bottom in Bollinger Band terms set the stage for a sustained uptrend in OHI (weekl y bars). Note that %b was much
higher on the second retest in October 2013 than it was at the momentum low in August.
We have come a long way since the bands were developed. Today we have a suite of Bollinger Bands tools with at least one tool in every major
technical analysis indicator category. These tools form a logically consistent analytical framework and are in our BB Tool Kits for a wide variety of
platforms: eSignal, MetaStock, NinjaTrader, TradeNavigator, TraderLink and TradeStation. And with more on the way; wherever you are, whatever you
trade, Bollinger Bands and the related tools will be there for you.
BOLLINGER BAND RULES

1. Bollinger Bands provide a relative definition of high and low. By definition price is high at the upper band and low at the lower band.
2. That relative definition can be used to compare price action and indicator action to arrive at rigorous buy and sell decisions.
3. Appropriate indicators can be derived from momentum, volume, sentiment, open interest, inter-market data, etc.
4. If more than one indicator is used the indicators should not be directly related to one another. For example, a momentum indicator might
complement a volume indicator successfully, but two momentum indicators aren't better than one.
BOLLINGER BANDS
5. Bollinger Bands can be used in pattern recognition to define/clarify pure price patterns such as "M" tops and "W" bottoms, momentum shifts, etc.
6. Tags of the bands are just that, tags not signals. A tag of the upper Bollinger Band is NOT in-and-of-itself a sell signal. A tag of the lower Bollinger
Band is NOT in-and-of-itself a buy signal.
7. In trending markets price can, and does, walk up the upper Bollinger Band and down the lower Bollinger Band.
8. Closes outside the Bollinger Bands are initially continuation signals, not reversal signals. (This has been the basis for many successful volatility
breakout systems.)
9. The default parameters of 20 periods for the moving average and standard deviation calculations, and two standard deviations for the width of the
bands are just that, defaults. The actual parameters needed for any given market/task may be different.
10. The average deployed as the middle Bollinger Band should not be the best one for crossovers. Rather, it should be descriptive of the intermediate-
term trend.
11. For consistent price containment: If the average is lengthened the number of standard deviations needs to be increased; from 2 at 20 periods, to
2.1 at 50 periods. Likewise, if the average is shortened the number of standard deviations should be reduced; from 2 at 20 periods, to 1.9 at 10
periods.
12.Traditional Bollinger Bands are based upon a simple moving average. This is because a simple average is used in the standard deviation
calculation and we wish to be logically consistent.
13. Exponential Bollinger Bands eliminate sudden changes in the width of the bands caused by large price changes exiting the back of the calculation
window. Exponential averages must be used for BOTH the middle band and in the calculation of standard deviation.
14. Make no statistical assumptions based on the use of the standard deviation calculation in the construction of the bands. The distribution of security
prices is non-normal and the typical sample size in most deployments of Bollinger Bands is too small for statistical significance. (In practice we typically
find 90%, not 95%, of the data inside Bollinger Bands with the default parameters)
15. %b tells us where we are in relation to the Bollinger Bands. The position within the bands is calculated using an adaptation of the formula for
Stochastics
16. %b has many uses; among the more important are identification of divergences, pattern recognition and the coding of trading systems using
Bollinger Bands.
17. Indicators can be normalized with %b, eliminating fixed thresholds in the process. To do this plot 50-period or longer Bollinger Bands on an
indicator and then calculate %b of the indicator.

BOLLINGER BANDS
18. BandWidth tells us how wide the Bollinger Bands are. The raw width is normalized using the middle band. Using the default parameters BandWidth
is four times the coefficient of variation.
19. BandWidth has many uses. Its most popular use is to identify "The Squeeze", but is also useful in identifying trend changes...
20. Bollinger Bands can be used on most financial time series, including equities, indices, foreign exchange, commodities, futures, options and bonds.
22. Bollinger Bands can be used on bars of any length, 5 minutes, one hour, daily, weekly, etc. The key is that the bars must contain enough activity to
give a robust picture of the price-formation mechanism at work.
23. Bollinger Bands do not provide continuous advice; rather they help identify setups where the odds may be in your favor.
Good Trading,
John Bollinger, CFA, CMT
Bollinger BandWidth
Introduction
Bollinger Band Width is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger refers to Bollinger Band Width as one
of two indicators that can be derived from Bollinger Bands. The other indicator is %B.
Band Width measures the percentage difference between the upper band and the lower band. BandWidth decreases as Bollinger Bands narrow and increases as
Bollinger Bands widen. Because Bollinger Bands are based on the standard deviation, falling Band Width reflects decreasing volatility and rising Band Width
reflects increasing volatility.
Calculation
( (Upper Band - Lower Band) / Middle Band) * 100
Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average usually set at 20 periods. The outer bands are usually
set 2 standard deviations above and below the middle band. Settings can be adjusted to suit the characteristics of particular securities or trading styles.
BOLLINGER BANDS
When calculating Band Width, the first step is to subtract the value of the lower band from the value of the upper band. This shows the absolute difference. This
difference is then divided by the middle band, which normalizes the value. This normalized Bandwidth can then be compared across different timeframes or with
the Band Width values for other securities.
The chart above shows the Nasdaq 100 ETF (QQQ) with Bollinger Bands, Band Width, and the Standard Deviation. Notice how Band Width tracks the Standard
Deviation (volatility). Both rise and fall together. The image below shows a spreadsheet with a calculation example.
BOLLINGER BANDS
Defining Narrowness
Narrow Band Width is relative. Band Width values should be gauged relative to prior Band Width values over a period of time. It is important to get a good look-
back period to define Band Width range for a particular ETF, index or stock. For example, an eight to twelve-month chart will show Band Width highs and lows over
a significant timeframe. Band Width is considered narrow as it approaches the lows of this range and wide as it approaches the high end.
BOLLINGER BANDS
BOLLINGER BANDS
Securities with low volatility will have lower BandWidth values than securities with high volatility. For example, the Utilities SPDR (XLU) represents utility stocks,
which have relatively low volatility. The Technology SPDR (XLK) represents technology stocks, which have relatively high volatilities. Because of lower volatility,
XLU will have consistently lower Band Width values than XLK. The 200-day moving average of XLU Band Width is below 5, while the 200-day moving average of
XLK Band Width is above 7.
Signal: The Squeeze

Bollinger Band Width is best known for identifying The Squeeze. This occurs when volatility falls to a very low level, as evidenced by the narrowing bands. The
upper and lower bands are based on the standard deviation, which is a measure of volatility. The bands narrow as price flattens or moves within a relatively narrow
range. The theory is that periods of low volatility are followed by periods of high volatility. Relatively narrow Band Width (a.k.a. the Squeeze) can foreshadow a
significant advance or decline. After a Squeeze, a price surge and subsequent band break signal the start of a new move. A new advance starts with a Squeeze and
subsequent break above the upper band. A new decline starts with a Squeeze and subsequent break below the lower band.
Chart 2 shows Alaska Airlines (ALK) with a squeeze in mid-June. After declining in April-May, ALK stabilized in early June as Bollinger Bands narrowed.
BandWidth dipped below 10 to put the Squeeze play on in mid-June. Keep in mind that 10 refers to 10%. In other words, the width of the bands is equal to 10% of
the middle band. Even though this level seems high, it is actually quite low for ALK. With the stock around 15-16, Band Width was less than 10% and at its lowest
level in over a year. With the subsequent surge above the upper band, the stock broke out to trigger an extended advance.
BOLLINGER BANDS
Chart 3 shows Aeropostale (ARO) with a couple of Squeezes. A horizontal line was added to the indicator window. This line marks 8, which is deemed relatively low
based on the historical range. The Band Width indicator alerted traders to be ready for a move in mid-August. The stock obliged with a surge above the upper band
and continued higher throughout September. The advance stalled in late September and Band Width narrowed again in October. Notice how Band Width declined
below the lows set in August and then flattened out. The subsequent break below the lower Bollinger Band triggered a bearish signal in late October.
BOLLINGER BANDS
The Squeeze can also be applied to weekly charts or longer timeframes. Volatility and Band Width are typically higher on the weekly timeframe than a daily
timeframe. This makes sense because larger price movements can be expected over longer timeframes. Chart 4 shows Barrick Gold (ABX) consolidating throughout
2006 and into 2007. As the consolidation narrowed and a triangle formed, Bollinger Bands contracted and Band Width dipped below 10 in January 2007. Notice
how Band Width remained at low levels as the consolidation extended. A bullish signal triggered with the breakout in July 2007. Band Width also rose as prices
moved sharply in one direction and Bollinger Bands widened.
BOLLINGER BANDS
Chart 5 shows Honeywell (HON) with an extended trading range in the 50-55 area. There was a move to the upper band in May, but no breakout for a signal.
Instead, HON clearly broke below the lower band to trigger a bearish signal in June 2007.
BOLLINGER BANDS
Summary
The Band Width indicator can be used to identify the Bollinger Band Squeeze. This alerts chartists to prepare for a move, but direction depends on the subsequent
band break. A squeeze followed by a break above the upper band is bullish, while a squeeze followed by a break below the lower band is bearish. Be careful of head-
fakes however. Sometimes the first break fails to hold as prices reverse the other way. Strong breaks hold and seldom look back. An upside breakout followed by an
immediate pullback should serve as a warning.
Suggested Scans
Bollinger Band Breakout

This scan reveals stocks whose Bollinger Bands just expanded rapidly after being contracted for 5 or more days.
[type = stock] AND [country = US]

AND [Daily SMA(20,Daily Volume) > 40000]
AND [Daily SMA(60,Daily Close) > 20]
AND [Daily BB Width(20,2) > Yesterday's max(5, BB Width(20,2)) * 2]

BOLLINGER BANDS
%B Indicator
Bollinger %B Indicator
Introduction
%B quantifies a security's price relative to the upper and lower Bollinger Band. There are six basic relationship levels:
%B equals 1 when price is at the upper band

%B equals 0 when price is at the lower band
%B is above 1 when price is above the upper band
%B is below 0 when price is below the lower band
%B is above .50 when price is above the middle band (20-day SMA)
%B is below .50 when price is below the middle band (20-day SMA)
Calculation
%B = (Price - Lower Band)/(Upper Band - Lower Band)
The default setting for %B is based on the default setting for Bollinger Bands (20,2). The bands are set 2 standard deviations above and below the 20-day
simple moving average, which is also the middle band. Security price is the close or the last trade.
Signals: Overbought/Oversold
%B can be used to identify overbought and oversold situations. However, it is important to know when to look for overbought readings and when to look for
oversold readings. As with most momentum oscillators, it is best to look for short-term oversold situations when the medium-term trend is up and short-term
overbought situations when the medium-term trend is down. In other words, look for opportunities in the direction of the bigger trend, such as a pullback within a
bigger uptrend. Define the bigger trend before looking for overbought or oversold readings.
Chart 1 shows Apple (AAPL) within a strong uptrend. Notice how %B moved above 1 several times, but did not even come close to 0. Even though %B moved above
1 numerous times, these overbought readings did not produce good sell signals. Pullbacks were shallow as Apple reversed well above the lower band and resumed
its uptrend. John Bollinger refers to walking the band during strong trends. In a strong uptrend, prices can walk up the upper band and rarely touch the lower
band. Conversely, prices can walk down the lower band and rarely touch the upper band in a strong downtrend.
BOLLINGER BANDS
After identifying a bigger up trend, %B can be considered oversold when it moves to zero or below. Remember, %B moves to zero when price hits the lower band
and below zero when price moves below the lower band. This represents a move that is 2 standard deviations below the 20-day moving average. Chart 2 shows the
Nasdaq 100 ETF (QQQQ) within an uptrend that began in March 2009. %B moved below zero three times during this uptrend. The oversold readings in early July
and early November provided good entry points to partake in the bigger uptrend (green arrows).
BOLLINGER BANDS
Signals: Trend Identification

John Bollinger described a trend-following system using %B with the Money Flow Index (MFI). An uptrend begins when %B is above .80 and MFI(10) is above 80.
MFI is bound between zero and one hundred. A move above 80 places MFI(10) in the upper 20% of its range, which is a strong reading. Downtrends are identified
when %B is below .20 and MFI(10) is below 20.
Chart 3 shows FedEx (FDX) with %B and MFI(10). An uptrend started in late July when %B was above .80 and MFI was above 80. This uptrend was subsequently
affirmed with two more signals in early September and mid November. While these signals were good for trend identification, traders would likely have had issues
with the risk-reward ratio after such big moves. It takes a substantial price surge to push %B above .80 and MFI(10) above 80 at the same time. Traders might
consider using this method to identify the trend and then look for appropriate overbought or oversold levels for better entry points.
BOLLINGER BANDS
Conclusions
%B quantifies the relationship between price and Bollinger Bands. Readings above .80 indicate that price is near the upper band. Readings below .20 indicate that
price is near the lower band. Surges towards the upper band show strength, but can sometimes be interpreted as overbought. Plunges to the lower band show
weakness, but can sometimes be interpreted as oversold. A lot depends on the underlying trend and other indicators. While %B can have some value on its own, it is
best when used in conjunction with other indicators or price analysis.

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BOLLINGER BANDS

ohn Bollinger answers "What are Bollinger Bands?"

alliteratively obvious choice: Bollinger Bands.

BOLLINGER BAND RULES

Band is NOT in-and-of-itself a buy signal.

calculation and we wish to be logically consistent.

indicator and then calculate %b of the indicator.

is four times the coefficient of variation.

give a robust picture of the price-formation mechanism at work.

John Bollinger, CFA, CMT

( (Upper Band - Lower Band) / Middle Band) * 100

Signal: The Squeeze

Bollinger Band Breakout

[type = stock] AND [country = US]

AND [Daily BB Width(20,2) > Yesterday's max(5, BB Width(20,2)) * 2]

%B equals 1 when price is at the upper band

%B = (Price - Lower Band)/(Upper Band - Lower Band)

Signals: Trend Identification

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