Introduction
Bollinger Bands measure volatility by placing
trading bands around a moving average. These bands are charted usually two
standard deviations away from the average, so as the average changes, the value
of two standard deviations also changes. This value is the Bollinger Band
Width, which represents the expanding and contracting of the bands based on
recent volatility.
During a period of rising price volatility, the
distance between the two bands will widen (BB Width will increase). Conversely,
during a period of low market volatility, the distance between the two bands
will contract (BB Width will decrease).
There is a tendency for bands to alternate
between expansion and contraction. When the bands are unusually far apart, that
is often a sign that the current trend may be ending. When the distance between
the two bands has narrowed too far, that is often a sign that a market may be
about to initiate a new trend.
This chart from Dell shows Bollinger Band Width
for a 20-day moving average using 4 standard deviations. It is easily seen how
a high BB Width often indicates a slowing trend (red lines), and how a low BB
Width often indicates a forming trend (green line).
Bollinger Band Width and SharpCharts
With SharpCharts, you can plot the Bollinger Band
Width indicator using an n-period simple moving average and any multiple of
standard deviations by entering the simple moving average-period setting and
standard deviation number into the Parameters text box using the format
"SMA-period,Std dev." You can also display it above, below, or behind
the price plot window. The Bollinger Band Width's default settings, of a
20-period simple moving average and 2 Standard Deviations, are illustrated
above.
