basically its a measure of activity measured with bands. as the bands contract and come together with time it indicates a decreasing level of activity in whatever market you're measuring. it also portends a burst of activity in either direction the timing and direction of which is difficult to predict. basically, its a moving picture of the calm before the storm.
I think the idea behind that is that as the fluctuations decrease, speculators start taking larger and larger positions close to the market value, expecting these predictable small fluctuations about the average, and consequently shrinking the fluctuations and stabilizing the price. They are making profit buying when low, selling when high. Eventually, some random amount of noise in the price, or a "malicious" person with money, will push the price past somebody's comfort level, and that person will sell or buy at a loss, pushing it further and causing more people to do the same until it cascades. It should be predictable if you have an idea of how much background noise there is and what the average fluctuation tolerance of the market is. When the tolerance falls below the noise, it is unstable.
yeah, everyone looks at these indicators differently. to me its a huge red flag that something big is about to happen. the trick is guessing which way the break will be.
i sit up in my seat when i see these formations whereas i bet most market participants who have less experience become lulled to sleep from the inaction and get themselves into a dangerous position.
its actually easier to buy and sell with larger fluctuations in price, aka, higher volatility. its difficult when the price moves are so small making it harder to fit your profitable trade into a smaller spread.
