Bandwidth - Indicator Formula
Updated
In analysis carried out with the help of Bollinger bands, Bandwidth is an indispensable aid. Since it has been noticed that the excessive narrowing of the Bollinger bands immediately leads to a push of the prices in a precise direction (to be identified with other instruments, such as %B), it is necessary to use an indicator that visualizes the entity of this amplitude.
The Bollinger Bandwidth is the difference between the Upper band and the Lower band, compared to the simple 20-day moving average, to facilitate comparisons on a relative basis; in practice, the Bandwidth offers the precise measurement of the width of the Bollinger bands.
Some considerations arise at this point:
given the link of the Bollinger Bandwidth with the standard deviation, we have an original measure of the volatility of the stock, in addition to the classic ADX, VHF etc.;
It is possible to develop a trading strategy based on Bollinger Bandwidth and Bollinger %B, the attractive stocks to buy will be those that have a low Bandwidth and a %B at the lower limits of the typical fluctuation band, while the stocks to sell will still have a Bandwidth at lower levels, but a %B in overbought (around 100);
better still, it is possible to automate everything, creating appropriate filters, using the VT explorer for example.
A comparison with a similar instrument - Welles Wilder's ADX - reveals the superiority of Bandwidth:
ADX is less ready to turn around to segment the beginning of a new trend or the end of the existing trend: it has been observed that Bandwidth responds one to two days earlier;
The Bandwidth returns to the starting point faster, while the ADX takes longer to return to the starting level and therefore to "zero": this may in some cases result in losing the start of a new trend;
consequently the Bandwidth is more decided at the beginning and at the end of the trend;
Unlike the ADX, the Bandwidth is able to signal the strength of a trend in its structure.
The other side of the coin must also be highlighted:
the readiness to respond, which is appreciable in promptly reporting trend reversals, sometimes proves to be a handicap, particularly when in sideways markets, those that have only false signals;
In other words, in times of low volatility in the market, there is a lack of precise indications: this is due to the presence of the standard deviation, which, based on a deviation from the moving average, which means that in markets that move very slowly, it does not deviate from its average values;
Finally, there is the lack of indications about the direction of the trend: the Bandwidth will tell us that a trend is about to start, but it doesn't tell us either the direction or the duration.
