BASIC THEORETICAL EXPLANATION
It is a technical indicator, based on a moving average, around which bands are drawn that widen or narrow depending on market volatility.
Volatility changes are cyclical and depend on time periods.
It uses the typical or standard deviation, which measures the dispersion or separation of the results with respect to their mean or average.
About 88% of the time the price will be within two standard deviations of its moving average.
When volatility increases the bands will open up, because the dispersion has increased and the standard deviation has also increased. And the opposite when volatility decreases.
It can be used together with reversal patterns, because they give us the information of whether the price is high or low.
Volatility explosions, as the bands expand when they occur, after periods of low volatility, periods of high volatility will follow. In other words, low volatility is the germ of high volatility.
We appreciate a channel that, although bearish, is lateralized, the bands are narrowing, until a volatility bomb occurs, from which the bands widen. An upward movement begins, where we would enter until (1º) where it manages to cross the upper band and the next band does not succeed, leaving a candle in both cases, the price goes back towards the middle line (2º) and begins to rise again (3, 4 and 5º) cross the upper band without problems indicating a healthy upward trend until reaching (6º) where it crosses again leaving a long wick, we observe that the following candle fails to cross with a shorter wick and a correction is produced until the middle line (7th), continues to rise and pivots on 2 occasions (8th) the upper band where it only pierces a piece of the wick and a very bearish movement occurs where we would wait to buy in the lower band (9th), at the end of this passes through leaving a wick and returning to the band of and the next candlestick the body stays above the band, it goes up to the upper band where we would sell (10º), at (11º) we would buy the wick corrects, but indicative that it can go down with acceleration, in this case it would not have even reached to the average, nor to the upper band and we would have sold where we had the stop with losses 🙁 , important support (12º), crosses the band on 2 occasions leaving a wick and consolidates, we would buy at this point, up to the upper band of the (13th), where it initially crosses strongly but corrects the wick within the channel twice and then fails to cross it (beginning bearish correction and reversal pattern). Next, there is a move to the lower band that touch (14º) and it does not manage to reach the upper band (15º), that is to say, we would have bought and we would not have been able to sell, it would go down later and we would have losses up to where we have placed the stop. It does not touch the lower band again until (16º) where we would buy.