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Bollinger Bands and Volatility

When volatility is high; prices close far away from the moving average, the Bands width increases to accommodate more possible price action movement that can fall within 95% of the mean.

 

Bollinger bands will widen as volatility widens. This will show as bulges around the price. When the bands widen like this it is a continuation pattern and price will continue moving in this direction. This is normally a continuation signal.

 

The example below illustrates the Bollinger bulge.

Bollinger bands will widen as volatility widens

High Volatility


When volatility is low; prices close closer towards the moving average, the width decreases to reduce the possible price action movement that can fall within 95% of the mean.

 

When volatility is low price will start to consolidate waiting for price to breakout. When the bollinger bands is moving sideways it is best to stay on the sidelines and not to place any trades.

 

The example is shown below when the bands narrowed.

Bollinger Bands Low Volatility

Low Volatility

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