Bollinger Bandwidth

The Bollinger Bandwidth indicator developed by John A. Bollinger is used to warn of a change in volatility. A narrowing of Bollinger Bands corresponds to a decrease in volatility and vice versa for a widening. This spread reported to the moving average gives an accurate measure of the volatility level, allowing comparison of volatility across different securities.

Calculation Method

Bollinger Bandwidth = (BH - BL)/ SMA

where:

• BH: the upper band of the Bollinger Bands
• BL: the lower band of the Bollinger Bands
• SMA: Arithmetic Moving Average of the same period as the Bollinger Bands

Example

Interpretation

An indicator approaching and descending below 2% indicates a significant decrease in volatility. When the indicator remains at this level for many periods, a significant trend change can be expected.