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What is the Bollinger BandWidth (BBW)?

Bollinger BandWidth (BBW) is a volatility indicator that was developed by John Bollinger and is was introduced in 2010. Bollinger BandWidth (BBW) is based on the Bollinger Bands indicator. It measures the width of the Bollinger Bands, i.e., the difference between the upper and lower bands, and is expressed as a percentage. The Bollinger BandWidth (BBW) is useful in identifying a Bollinger Band Squeeze.

How is the Bollinger BandWidth (BBW) calculated?

The Bollinger BandWidth (BBW) is calculated in three steps:

• First, the value of the lower band is simply subtracted from the value of the upper band. This difference results in an absolute value:
  Upper Band − Lower Band
• Then, the absolute difference between the two bands is divided by the price value of the middle band, i.e., the central SMA, to produce a normalized value that is between zero and one:
  ( Upper Band − Lower Band ) ÷ Middle Band
• Finally, the normalized value is multiplied by 100 to produce a percentage value.

The complete formula for the Bollinger BandWidth (BBW) is:

BBW = ( ( Upper Band − Lower Band ) ÷ Middle Band ) × 100

The result is a range-bound indicator plotted as a line that oscillates between zero and one hundred.

How to use the Bollinger BandWidth (BBW)

The most significant use of the Bollinger BandWidth (BBW) is to identify the moment when an underlying security shifts from a period of low volatility, characterized by non-trending sideways price action, to a period of high volatility, with a strong trend. During a period of low volatility, the BBW declines as the Bollinger Bands contract, and increases as volatility increases and the Bollinger Bands widen.

Identifying when the BBW is narrow is dependent on the volatility of the underlying security. Indeed, the range of the BBW is dependent on the volatility of the underlying security. A security with a high volatility will have a wider range of BBW values, while a security with a lower volatility will have a narrower range of BBW values. Therefore, the extremes of the BBW for a particular security gauged against the past fluctuations of the BBW for that security.

When the BBW reaches the lower extremes for a security, the volatility of that security is at a low and the Bollinger Bands are quite narrow. This is referred to as a Bollinger Band Squeeze and its occurrence is normally followed a price surge, with a band break signaling the start of a new price movement.

A new bullish price movement, or uptrend, starts with a Bollinger Band Squeeze and a price break above the upper band, while a new bearish downtrend starts with a Bollinger Band Squeeze and a price break below the lower band.