Bollinger Bands are used to identify volatility in the following ways:
- Price moving outside the bands: When the price moves outside the upper or lower Bollinger Bands, it is considered to be an indication of high volatility. The wider the bands, the higher the volatility.
- Periods of contraction and expansion: Bollinger Bands can provide insights into periods of low and high volatility through their contraction and expansion. When the bands are narrow, it indicates low volatility, while widening bands suggest increasing volatility.
- Squeezes: A Bollinger Band squeeze occurs when the bands become extremely narrow, indicating a period of low volatility. This often precedes a significant price move or breakout, signaling a potential upcoming increase in volatility.
- Moving Average convergence/divergence (MACD): By combining Bollinger Bands with the MACD indicator, traders can identify volatility shifts. When the MACD line crosses above or below the signal line while the price is near the upper or lower Bollinger Band, it suggests a potential increase in volatility.
Overall, Bollinger Bands provide useful visual cues for identifying periods of high or low volatility, which can help traders make informed decisions about potential price movements.