I have a small question regarding Bollinger Bands: If upper and bollinger bands either converge (both bands are getting more and more close together) or diverge (both bands are getting more and more away from each other), does that mean the market is TRENDING? Or is market trending only in case if both bands, upper and lower, are parallel and at the same time NOT horizontal? Thank you.
If upper and Bollinger bands either converge ... or diverge ..., does that mean the market is TRENDING?
No - Bollinger bands measure volatility, which is an measure of how much variation there is in the price of the instrument. It does not indicate a trend which means that the instrument tends to move in a consistent direction. When Bollinger bands are close together, that means volatility is relatively low, and vice-versa.
They can be interpreted as signals that a stock might move in one direction or the other, but they are not a measure of directional movement.
If upper and bollinger bands either converge (both bands are getting more and more close together) or diverge (both bands are getting more and more away from each other), does that mean the market is TRENDING?
The answer is no. The divergence or convergence of BB-upper & lower band does not indicate if the market is trending or not. It only indicated if volatility is increasing or decreasing.
Or is market trending only in case if both bands, upper and lower, are parallel and at the same time NOT horizontal?
The answer is yes. To understand the reason consider that BB is constructed from a central Moving Average along with standard deviation. Upper Band=MA+2*SD, Lower Band=MA-2*SD. A moving average is a trend following indicator and volatility has nothing to do with trend (as SD only measures the price movement around the mean). Which essentially means BB has trend following qualities. The upper and lower bands remain more or less parallel in between band contraction and expansion.
You shall see distinctly phases when BB bands are not parallel and are parallel and not horizontal. As mentioned above, when BB bands are expanding or contracting they do not give indication of the trend direction. When they are parallel, close or apart and not horizontal, they provide a good directional bias through the general slope. Though a more effective method to determine trend and its direction is the central MA of BB.
Again, refer below:
Here you can see that some portion of the bands are parallel and more or less horizontal. The price action would tell you that the stock is now range-bound as opposed to trending.
The primary use of the BB bands are to gauge volatility as @misantroop stated. The primary trend direction is usually derived from the central MA.
Bollinger Bands are placed standard deviations away from the moving average. Therefore if the price is volatile, the bands diverge from the mean. During consolidation the bands would converge. They do not provide a clear indication of whether the price is trending or not.