Market strength: the RSI measures one thing and the BBWP another

When someone says a market is strong they are usually mixing two different questions: how far price has travelled and how much it is moving. These are not the same thing, and in fact the most useful answers appear precisely when the two disagree.

Two questions with different answers

The RSI answers the first: of all the recent movement, how much of it was upward. It measures travel. An RSI of 70 says the last sessions have been mostly up, and nothing more.

The BBWP answers the second: how wide or narrow the market is compared with its own history. It measures volatility, and it has no sign. A high BBWP is just as high in a vertical rally as in a collapse.

Combining them is not stacking indicators for the sake of it. One says where price is and the other what regime the market is in, and the second completely changes what the first means.

What the BBWP actually is

It is built in two steps. First it measures band width: the distance between the upper and lower Bollinger Band, divided by the middle average so it comes out as a percentage. Second, and this is the idea, it works out what percentile that width occupies within a long stretch of its own history, usually a year.

The result runs from 0 to 100 and reads literally. A BBWP of 8 means today's width is below 92 % of the widths of the past year: the market is more compressed than usual for itself. A BBWP of 95 means the opposite.

That second step is what makes it useful, and the diagram above shows why. Two assets can have exactly the same absolute width today and be in opposite situations: on one it is among the narrowest of its year, on the other among the widest. Raw width is not comparable; the percentile is. It is the same trick that turns a candle's volume into relative volume: divide by the asset's own habit.

What compression says and what it does not

A low BBWP indicates the range has narrowed. Volatility tends to alternate between quiet and agitated periods, so a prolonged compression usually ends in an expansion.

Nor does it say when. A compression can last weeks or months, and the market can keep narrowing throughout. There is no threshold beyond which expansion becomes imminent.

And there is a trap in the other direction: a high BBWP does not mean the move will continue. It means it is already happening. Entering with the BBWP at 95 is entering the part of the move that has already been seen, with the ATR dilated and therefore with necessarily wider stops.

The four combinations

What can be read is the crossing of the two measures.

The row almost nobody looks at is the first. A high RSI is usually read as overbought and a reason to exit, but with a low BBWP it means something different: price is rising without volatility having broken loose yet. Those tend to be the phases where a move still has room, and they are exactly the ones the RSI alone classifies badly.

The parameter that changes everything

The BBWP depends on two windows: the bands' (usually 20 periods) and the percentile's (usually 252, a year of sessions).

The second deserves attention. If the percentile window is short, the indicator compares today's width with a small slice of history and will saturate at 0 or 100 constantly. If it is very long, it can drag in volatility regimes that have nothing to do with the current market. And there is a practical consequence people forget: two BBWPs with different windows are not the same indicator and cannot be compared with each other.

Common mistakes

Reading the BBWP as a buy signal. This is the central error. It measures volatility, not direction. In a compression you have to wait for price to leave the range and confirm which side it left by.

Confusing BBWP with band width. They are two different numbers. Width is absolute and cannot be compared; the BBWP is that width's rank within its own history.

Assuming a low BBWP on a small coin is a bullish compression. On illiquid assets a narrow range often means nobody is trading, and that can continue indefinitely.

Expecting symmetry. Downward expansions tend to be faster and more violent than upward ones, so the same compression does not imply the same risk in both directions.

On each asset

On Bitcoin the weekly BBWP is where the alternation between calm and agitation shows most clearly, because its history is long enough for the percentile to mean something. On Ethereum it is worth reading over the ETH/BTC ratio as well: a compression in the ratio indicates ETH and BTC have been moving in step for a while, and the break of that compression often marks which side takes the lead. On XRP the BBWP tends to go from lows to highs within a few sessions because of its dependence on news, so intermediate values are short-lived and tell you less.

Frequently asked questions