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Forex Indicator Bollinger Bandwidth

Bollinger Bandwidth is an important indicator derived from John Bollinger's original Bollinger Bands indicator. Bandwidth is a relative measure of the width of the Bollinger Bands. The Bollinger Bandwidth equation can be constructed as:

Bandwidth = (Bollinger Upper Band - Bollinger Lower Band) / Bollinger Middle Band

Volatility is high when the Bollinger Bands are farther apart and low when the Bollinger Bands are closer together. Based on the assumption that price (and volatility) generally operates in cycles - periods of low volatility inevitably followed by periods of high volatility and so on and so forth - traders can learn to take advantage of these cycles.

Interpretation

The Bollinger Bandwidth is particularly useful in helping traders identify "the Squeeze". Bollinger states that Bollinger Bands "are driven by volatility, and the Squeeze is a pure reflection of that volatility". The Squeeze is similar to "the calm before the storm". The Squeeze is identified when the Bandwidth is at its lowest low value within n-periods.

Trading signals can be generated based on the breakout of price (and volatility) following the Squeeze.

The most difficult part of trading breakout signals is determining the direction of the price breakout. Bollinger suggests using other indicators like the Relative Strength Index (RSI) and a volume-based indicator such as Accumulation/Distribution for confirmation combined with the Squeeze setup.

Bollinger also suggests looking for positive and negative divergence between indicators and price as an indication of the potential breakout direction. Positive divergence (indicators rising while price is declining or remaining neutral) is often considered a bullish sign while negative divergence (indicators declining while price is rising) is considered a bearish sign.

Lastly, traders should be on the lookout for "false breakouts" (a.k.a. "Head Fakes" by Bollinger). Price often breaks out in one direction immediately following the Squeeze causing many traders to think the breakout will continue in that direction, only to quickly reverse and make the true, more significant breakout in the opposite direction. Traders acting quickly on the initial breakout (and perhaps without confirmation from other indicators) often get caught on the wrong side of the price action, while those traders expecting a "false breakout" can quickly close out their original position (if they have one open) and enter a trade in the direction of the reversal.

Implementation

The Bollinger Bands Price, Periods, MA Type, and Standard Deviations as well as the Bulge Periods and the Squeeze Periods inputs have been parameterized to allow the user full customization of this indicator. Furthermore, reference lines for "The Bulge" (blue line - the highest Bandwidth value within the previous n-periods) and "The Squeeze" (red line - lowest Bandwidth value within the previous n-periods) have also been included.

 

Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. 

 

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