What does the Bandwidth Indicator measure?

The Bandwidth Indicator measures the difference between two bands, typically associated with a moving average or volatility channels, which provides insight into market volatility. This indicator is often used with Bollinger Bands or similar tools where the upper and lower bands are constructed around a moving average.

When the distance between the bands widens, it indicates increased volatility in the market, suggesting a potential for larger price movements. Conversely, when the bands are closer together, it signifies lower volatility, which can indicate a period of consolidation or potential market calmness.

By examining the bandwidth, traders can gauge not only current volatility but also assess potential breakouts or trend reversals, making it a valuable tool for technical analysis. This is crucial for traders looking to make decisions based on market conditions; understanding volatility can help in risk management and trade planning.