I check this list to find stocks which are actually moving out of their trading ranges. Relatively narrow BandWidth a. These stocks may not be ready to be traded , as they are simply consolidating. Published 06 Jun by TraderMike in scans screens pullbacks signals bollinger bands bollinger band squeeze. Those phases or cycles are what these BB Squeeze scans help us identify.
Securities with low volatility will have lower BandWidth values than securities with high volatility. Bollinger BandWidth 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 BandWidth a. 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. BandWidth dipped below 10 to put the Squeeze play on in mid-June.
Even though this level seems high, it is actually quite low for ALK. With the subsequent surge above the upper band, the stock broke out to trigger an extended advance. A horizontal line was added to the indicator window. This line marks 8, which is deemed relatively low based on the historical range. The BandWidth 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 BandWidth narrowed again in October. Notice how BandWidth 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. The Squeeze can also be applied to weekly charts or longer timeframes.
Volatility and BandWidth are typically higher on the weekly timeframe than a daily timeframe. This makes sense because larger price movements can be expected over longer timeframes. As the consolidation narrowed and a triangle formed, Bollinger Bands contracted and BandWidth dipped below 10 in January Notice how BandWidth remained at low levels as the consolidation extended. A bullish signal triggered with the breakout in July BandWidth also rose as prices moved sharply in one direction and Bollinger Bands widened.
Chart 5 shows Honeywell HON with an extended trading range in the 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 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. Bollinger BandWidth can be found in the indicator list on SharpCharts. We'll see why you might want to use one of those scans instead of the primary BB Squeeze scan.
Bollinger Bands, developed by John Bollinger, consist of three lines: The standard settings for those lines, which SwingTradeBot uses, are a day moving average and 2 standard deviations.
Sometimes the moving average will be referred to as the "middle band". The bands provide a few functions. Low is considered to be at or near the lower band, while high is at or near the upper band. You'll often see the bands "open up" and let price rise along the upper band or fall along the lower band called Walking the Bands. The bands also clearly display when prices are in phases of high or low volatility. Those phases or cycles are what these BB Squeeze scans help us identify.
To quote John Bollinger from his book: Bollinger on Bollinger Bands:. Bollinger Bands are driven by volatility, and The Squeeze is a pure reflection of that volatility. When volatility falls to historically low levels, The Squeeze is on. BandWidth depicts volatility as a function of the average. The Squeeze has several definitions. For some years there has been an academic theory in circulation that suggests that while price is neither cyclical nor forecastable, volatility is both.
The most important aspect of this theory of volatility, that low volatility begets high volatility, and high volatility begets low. If it is a quiet day, expect a storm. If it is a stormy day, expect quiet. BandWidth must be near its lowest levels in the last 6 months.
As you'll see if you look at some of the scan results, sometimes that 6-month low doesn't result in an impressive tightening of the bands. If you don't see an obvious tightening in the bands I'd say to just skip that stock.
Here are a couple of charts showing Squeezes:. An important use of BandWidth is to mark the beginning of directional trends, either up or down. Many trends are born in trading ranges when the BandWidth is quite narrow. A breakout from the trading range that is accompanied by a sharp expansion in BandWidth is often the mark of the beginning of a sustainable trend.
However, note that not all of those squeezes turned into big expansions in volatilty. There are no guarantees of what will happen once a Squeeze ends! Nor does it guarantee high volatility is coming. Volatitlity could simply gradually increase. A Squeeze is simply a precondition for a possible volatility breakout. John Bollinger has laid out some simple steps for trading based on a Squeeze:.
Beware the head fake. An attempted move lower will reverse higher. That attempted breakdown may often also touch or break below the lower band.
You'll see the opposite for attempted breakouts. Use volume indicators for direction clues. Is volume picking up on up days? Does the range narrow on down days?