Bollinger Bands® % B
Bollinger Bands %B is closely related to John Bollinger's original Bollinger Bands indicator. Bollinger Bands %B measures where the most recent close falls within the upper and lower Bollinger Bands, and can expose the extent to which price closes outside the range of the upper and lower bands.
When price closes at the upper band, the %B indicator will show a reading of 1. When price closes at the lower band, the %B indicator will show a reading of 0. Readings above 1 indicate a close above the upper band, and readings below 0 indicate a close below the lower band. Values above .50 signify a price close above the middle (moving average) band, while values below .50 reflect a price close below the middle band.
The calculation of Bollinger Band %B is: %B = (Price - Lower Band)/(Upper Band - Lower Band)
Using Bollinger Bands® %B
The %B indicator is often used to define overbought and oversold conditions. As with other indicators used in this manner, the best results are observed when filtering readings with the underlying trend. For example, an oversold reading on the %B indicator will be most effective when it's used to help spot entry points that occur as a result of a short-term pullback during a larger timeframe uptrend. Bollinger Band %B can also be combined with other indicators and price patterns to enhance the clarity of a potential signal.
The default setting for %B is based on the default setting for the Bollinger Bands. Both indicators are shown in the chart below. The Bollinger Bands in this example are set at a 20-day simple moving average and 2 standard deviations above and below the moving average. These same parameters are then duplicated in the %B indicator.
In this chart example, XYZ is in a well-defined, intermediate-term uptrend. When price pulls back to the lower Bollinger Band, which represents a 2-standard-deviation move from the 20-period moving average, a trader may look to buy. Note that when this occurs, the %B indicator is simultaneously approaching the zero level. The opposite would be true for downtrends, where rallies to the upper Bollinger Band (a %B reading near 1) would present an opportunity to exit an existing position or to initiate a new short sale.
The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision.
Any specific securities, or types of securities, shown are for demonstration purposes only and should not be considered investment advice. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision