Learn Forex – Using Bollinger BandWidth in Forex Trading
Learn Forex (FXpath.com) – Bollinger BandWidth is a particularly useful indicator for trading forex that is closely related to its volatility-indicating cousin, the Bollinger Bands. Whereas the Bollinger Bands are overlaid directly on top of price, as shown on the accompanying EUR/USD daily chart, the Bollinger BandWidth indicator usually resides either vertically above or below the price pane, also as shown on the chart.
What does the Bollinger BandWidth indicator do? It simply shows the width of the Bollinger Bands in relative terms. The formula is as follows: (upper BB – lower BB) / middle band. What can you do with the Bollinger BandWidth indicator that works even better than on the Bollinger Bands themselves? For one, it is easier on the Bollinger BandWidth indicator to pinpoint the bursts from low volatility to high volatility that often result in strongly directional trend moves. This is also called the “Squeeze”, where the Bollinger Bands narrow in low volatility (e.g., consolidation) and then widen when a directional volatility breakout occurs. These volatility breakouts can easily be identified simply by drawing downtrend resistance lines on the Bollinger BandWidth indicator, as shown on the accompanying EUR/USD daily chart. Once a breakout above one of these downtrend resistance lines occurs on the BandWidth, there is a distinct potential for a volatility breakout on price that results in a trend move in either direction.
It should be kept firmly in mind that the Bollinger BandWidth is NOT price directional. The up and down moves of the indicator simply indicate relative levels of volatility, and not price direction. Therefore, on the Bollinger BandWidth indicator, a trader would always be looking for a break of volatility to the upside (and NOT to the downside), which could mean a move either to the upside OR to the downside on price itself. In the two examples shown on the accompanying EUR/USD chart, the volatility breakouts to the upside above the downtrend resistance lines on BandWidth both resulted in down moves on price.
Overall, Bollinger BandWidth can be an important tool in any forex trader’s arsenal to identify potential areas of volatility breakout that can often turn into strong directional price moves.
James Chen, CTA, CMT (bio)
- Click here for my book, Essentials of Foreign Exchange Trading (Wiley).
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Comments
I would be interested in using this but as a newbie not sure how i would cretae the script to use in on the Ninja Trader platform
Can you suggest how I can solve my problem?
Thanks
Thanks for your comments, Peter and Greg! Peter, in my experience, the BandWidth adds a lot to the Bands themselves, depending on your strategy and how you use them. Greg, I’m sorry, I am not familiar with the Ninja Trader platform, so I wouldn’t be able to help you with that. You might want to post your question on a forum (like ForexFactory) and see if anyone has any input or advice. Thanks again.
James Chen
I’ve been constructing a system using Stochastics and CCI. This might be a good addition, sort of a cofirming indicator for an especially good swing trade on my daily charts.
hello Chen, thanks for the indicator and your explanation. however, how can one get the indicator for mt4 platform?
thanks
Hi Anthony,
Thanks for your question. I am not completely familiar with the MT4 platform, but most major charting software include the Bollinger BandWidth indicator. If MT4 doesn’t have it, I’m sure that there is some kind of an add-on that you can find to include it in MT4. Thanks, Anthony.
James Chen
Smart way to use Bollinger Bands. I personally prefer MACD and Stochastics. For some reason when I used BBs I traded with a false sense of security.
Your technique might work much better than the standard BBs.