Bollinger Bands Bandwidth, Narrow Means Calm and Wide Means High Volatility

TL;DR

• Bandwidth is the distance between the upper and lower Bollinger Bands and shows the magnitude of volatility.
• Narrow bandwidth indicates low volatility, wide bandwidth indicates high volatility, but it does not necessarily signal a trend reversal.

Definition of Bollinger Bands and Bandwidth

Bollinger Bands typically consist of a central simple moving average (SMA) and bands above and below it set by a multiple of standard deviation. Bandwidth is commonly defined as the difference between the upper and lower bands divided by the middle value, providing a standardized measure of relative volatility. The formula example is below.

• Middle line: N-period simple moving average (SMA)
• Upper: SMA + K * standard deviation
• Lower: SMA - K * standard deviation
• Bandwidth: (Upper - Lower) / SMA = (2 K standard deviation) / SMA

N and K are adjustable parameters, typically N=20 and K=2, but they can vary by environment. Please check current standards with brokerage firms or tax authorities as needed.

Why bandwidth matters

Bandwidth shows the strength and uncertainty of price moves at a glance. For the same asset, a narrow bandwidth means relatively stable prices, and a wide bandwidth means sharp volatility is occurring or likely. Traders use bandwidth expansion and contraction to assess market conditions and inform risk management.

However, bandwidth does not provide direction, and expansion alone does not mean an uptrend or downtrend. Bandwidth measures only volatility magnitude, so trend confirmation requires other indicators or price action.

Calculation example (hypothetical numbers)

Assumption: N=20, K=2

• SMA of last 20 closing prices = 50 won
• Standard deviation of last 20 closing prices = 3 won

Upper band = SMA + K standard deviation = 50 + 2 3 = 56 won
Lower band = SMA - K standard deviation = 50 - 2 3 = 44 won
Bandwidth = (Upper - Lower) / SMA = (56 - 44) / 50 = 12 / 50 = 0.24 → 24%

In this example bandwidth is 24%, which indicates relatively high volatility. If the standard deviation were 1 won, bandwidth would be 4%, indicating low volatility.

Common misconceptions and cautions

1. Band contraction is not always a precursor to a large drop or surge. Contraction means reduced volatility, and it can be followed by either a large move or continued calm.

1. Band expansion does not equal trend strength. If price breaks outside the bands during expansion, that is a strong move, but direction must be verified separately.

1. Interpreting absolute values is risky. Compare with other assets or periods using relative metrics or historical distributions.

In technical analysis, it is safer to use bandwidth alongside volume, moving averages, and momentum indicators rather than alone. We recommend comparing bandwidth with other indicators in Chart Technical Analysis.

This article is for informational purposes and is not investment advice.