Bitcoin (BTC) traders may be in for a volatile ride soon, as a well-known volatility indicator suggests that BTC’s range-bound trading could soon end.
The Bollinger bandwidth, a key technical tool for predicting market fluctuations, is signaling that a burst of volatility might be on the way. This indicator is currently positioned similarly to how it was in early November, right before a major price surge for bitcoin.
The Bollinger bandwidth measures the spread between the upper and lower Bollinger Bands, which are calculated two standard deviations above and below the 20-day moving average of the asset’s price. When the bandwidth narrows, it suggests lower volatility, and when it widens, it typically points to an increase in market turbulence.
Currently, the bandwidth for bitcoin is under 10%, a level not seen since November 4, just before the U.S. elections. Following that, bitcoin skyrocketed from $70,000 to $100,000 in just four weeks. Historically, whenever the daily bandwidth drops below 10%, it often precedes periods of increased volatility and price movement in either direction. In June, for instance, a similar bandwidth contraction preceded a price drop from $69,000 to $54,000 over three weeks.
Traders often wait for the market to confirm a price direction, watching for a breakout above the upper band (which signals a bullish move) or a dip below the lower band (which suggests a bearish move).
At the time of writing, bitcoin is trading between the two bands, providing no clear direction. However, many traders are anticipating a potential surge in volatility and may take derivative positions to profit from future price swings, regardless of which direction they go.
