Bollinger Bands %B

%B is an indicator derived from Bollinger Bands. In his book, Bollinger on Bollinger Bands, John Bollinger refers to %B as one of two indicators that can be derived from Bollinger Bands. The other indicator is Bollinger Band width.

Study Type: Stand-alone

Description

%B quantifies a security's price relative to the upper and lower Bollinger Band®. There are six basic relationship levels:

• %B equals 1 when price is at the upper band
• %B equals 0 when price is at the lower band
• %B is above 1 when price is above the upper band
• %B is below 0 when price is below the lower band
• %B is above .50 when price is above the middle band (20-day SMA)
• %B is below .50 when price is below the middle band (20-day SMA)

The default setting for %B is based on the default setting for Bollinger Bands® (20,2). The bands are set 2 standard deviations above and below the 20-day simple moving average, which is also the middle band. Security price is the close or the last trade.

%B can be used to identify overbought and oversold situations. However, it is important to know when to look for overbought readings and when to look for oversold readings. As with most momentum oscillators, it is best to look for short-term oversold situations when the medium-term trend is up and short-term overbought situations when the medium-term trend is down. In other words, look for opportunities in the direction of the bigger trend, such as a pullback within a bigger uptrend. Define the bigger trend before looking for overbought or oversold readings.

After identifying a bigger up trend, %B can be considered oversold when it moves to zero or below. Remember, %B moves to zero when price hits the lower band and below zero when price moves below the lower band. This represents a move that is 2 standard deviations below the 20-day moving average.

John Bollinger's book also featured a trend-following system using %B with the Money Force Index, also known as the Money Flow Index. An uptrend begins when %B is above .80 and MFI is above 80. MFI is bound between zero and one hundred. A move above 80 places MFI in the upper 20% of its range, which is a strong reading. Bollinger suggested setting MFI periods at 1/2 the number of Bollinger Band® periods, which would be 10. Downtrends are identified when %B is below .20 and MFI is below 20.

Conclusions

%B quantifies the relationship between price and Bollinger Bands®. Readings above .80 indicate that price is near the upper band. Readings below .20 indicate that price is near the lower band. Surges towards the upper band show strength, but can sometimes be interpreted as overbought. Plunges to the lower band show weakness, but can sometimes be interpreted as oversold. A lot depends on the underlying trend and other indicators. While %B can have some value on its own, it is best when used in conjunction with other indicators or price analysis.

Formula

%B = (Price - Lower Band)/(Upper Band - Lower Band)

Parameters

• Period: (20) - the number of bars, or period, used to calculate the study. John Bollinger, the creator of this study, states that those periods of less than ten days do not seem to work well for Bollinger Bands®. He says that the optimal period for most applications is 20 or 21 days.
• Deviations: (2) - or Band Width (the half-width of the band in terms of multiples of standard deviation).

 

 

(Source: StockCharts.com)