John Bollinger’s famous axiom states that "low volatility is where trends are born, and high volatility is where they go to die" (often phrased as trends are born in squeezes and die in bulges/expansions). This concept forms the core of volatility-based technical analysis using Bollinger Bands.
Understanding the Volatility Cycle.
The Squeeze (Low Volatility): When market prices consolidate sideways, the upper and lower bands contract tightly together. This low-volatility compression signals that a major breakout or trend birth is near.
The Expansion (High Volatility): As prices burst out of the squeeze, volatility expands and the bands widen sharply. This surge fuels the active directional trend.
The Bulge (Extreme Volatility): When volatility reaches an unsustainable peak and the bands widen excessively, the underlying momentum exhausts itself, signaling that the trend is ending or reversing.
In the chart below, we have included Bollinger bands and three custom indicators
- The Bollinger Bulge and Squeeze indicator
- The MACD-V Indicator
- The Choppiness Index
The Bollinger Bulge and Squeeze indicator moves to +1 when Bollinger Bands contract indicating a period of market consolidation where the risk of the development of a strong trend in either direction increases.
A move to -1 indicates a state of high volatility where the Bollinger bands have expanded to such an extent that a phase of trend exhaustion is highly likely.
The MACD-V indicator, developed by Alex Spiroglou, CFTe shows us the trend direction and strength.
The Choppiness Index tends to lie between 50 and 60 in periods of trendless activity.
Values under 35 tell us that a strong market trend has been in place and that the risk of trend exhaustion is near.