2006issue C131-8
Combining BandWidth extremes with a Stochastic oscillator and a Volatility breakout
BandWidth marks expansion and contraction without naming a side. The historical workflow then uses a Stochastic oscillator at an extreme to assign direction, and a Squeeze as the setup for a Volatility breakout. TradersWeek editorial reading: keep that confirmation order, and do not treat Extreme Bandwidth as a new oscillator or a complete system.
- Volatility is the high-to-low price spread over a chosen interval, and BandWidth tracks the outer Bollinger Bands gap as a share of the middle-band average, rising with expansion and falling with contraction regardless of price direction.
- A Squeeze is BandWidth at its lowest level over the prior six months and is the setup for a Volatility breakout after the bands pinch. Extreme Bandwidth is an eight-period rate of change that can flag milder expansions and contractions, often one to five bars before BandWidth turns.
- After Extreme Bandwidth falls below -30, a Stochastic oscillator at or beyond its 20 or 80 line assigns a side to the next expansion. After an expansion extreme near an outer band, one procedure waits for a turn and treats the middle band as the first objective.
- Extreme Bandwidth is an alert rather than a complete system, because price can continue after the extreme zone is entered and strong trends can produce false momentum turns.
What BandWidth measures
Volatility is the high-to-low price spread over a chosen interval. A consolidating range is treated as low volatility, and a sharp widening of that range is treated as high volatility.
Bollinger Bands overlay a moving average with outer bands two standard deviations above and below it. The gap between those bands tracks expansion and contraction of price versus the average.
BandWidth is the outer-band gap divided by the middle-band moving average. It is commonly computed from a 20-period simple average. The reading rises with expansion and falls with contraction, regardless of price direction.
Squeeze and Extreme Bandwidth
A Squeeze is BandWidth at its lowest level over the prior six months. In the historical workflow, that pinch is the setup for a Volatility breakout procedure after the bands pinch.
Extreme Bandwidth is an eight-period rate of change of BandWidth. It oscillates around zero. Expansion extremes begin near +35 and contraction extremes begin near -30. Those levels were chosen by trial rather than a statistical test.
Extreme Bandwidth can flag expansions and contractions that look minor on raw BandWidth. Those extreme-zone marks often appear one to five bars before the original BandWidth turns.
How a side and a first objective are assigned
After an expansion extreme near an outer band, one procedure waits for a turn and treats the middle band as the first objective.
After Extreme Bandwidth falls below -30, a Stochastic oscillator at or beyond its 20 or 80 line is used to assign a side to the next expansion.
Why Extreme Bandwidth stays an alert
Extreme Bandwidth is an alert rather than a complete system. Price can continue after the extreme zone is entered. Strong trends produce false momentum turns. Another confirming filter is required before treating a reading as a change in price.
All readings on this track · 11 readings
- 1995A tight-range volatility breakout as one classroom procedure
- 1995Constructing range-compression breakout procedures
- 1996Volatility contraction and narrow-range breakout rules
- 1998Gold volatility breakout as one written entry and exit procedure
- 2005Evaluating next-day range expansion breakouts
- 2006Combining BandWidth extremes with a Stochastic oscillator and a Volatility breakout
- 2007Gating currency volatility breakouts with ADX and trailing stops
- 2010Closing half-hour longs after late bear rallies
- 2013Bollinger Bands, volatility breakout, and breakout confirmation as one testable procedure
- 2014Confirming swing breakouts after wide-range cups and gaps
- 2019Extreme-seeking volatility with bands, breakouts, and chandelier exits