Bollinger Bands% B

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%B Indicator

Table of Contents

%B Indicator

Introduction

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

Calculation

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.

Signals: Overbought/Oversold

%B can be used to identify overbought and oversold situations. However, it is important to know when to look for overbought vs. 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. You must define the bigger trend before looking for overbought or oversold readings.

Chart 1 shows Apple (AAPL) within a strong uptrend. %B moved above 1 several times, but these “overbought” readings still failed to produce good sell signals. Pullbacks were shallow as Apple reversed well above the lower band and resumed its uptrend. John Bollinger refers to “walking the band” during strong trends. This refers to the notion that, in a strong uptrend, prices can walk up the upper band and rarely touch the lower band. Conversely, in a strong downtrend, prices can walk down the lower band and rarely touch the upper band.

After identifying a bigger uptrend, %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. Chart 2 shows the Nasdaq 100 ETF (QQQQ) within an uptrend that began in March 2009. %B moved below zero three times during this uptrend. The oversold readings in early July and early November provided good entry points to partake in the bigger uptrend (green arrows).

Signals: Trend Identification

John Bollinger described a trend-following system using %B with the Money Flow Index (MFI). An uptrend begins when %B is above .80 and MFI(10) is above 80. MFI is bound between zero and one hundred. A move above 80 places MFI(10) in the upper 20% of its range, which is a strong reading. Downtrends are identified when %B is below .20 and MFI(10) is below 20.

Chart 3 shows FedEx (FDX) with %B and MFI(10). An uptrend started in late July when %B was above .80 and MFI was above 80. This uptrend was subsequently affirmed with two more signals in early September and mid-November. While these signals were good for trend identification, traders would likely have had issues with the risk-reward ratio after such big moves. It takes a substantial price surge to push %B above .80 and MFI(10) above 80 at the same time. Traders might consider using this method to identify the trend and then look for appropriate overbought or oversold levels for better entry points.

Conclusion

%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.

Using with SharpCharts

%B can be found in the indicator list on SharpCharts. The default parameters (20,2) are based on the default parameters for Bollinger Bands, though these can be changed accordingly. 20 represents the periods in the simple moving average, while 2 represents the number of standard deviations for the upper and lower band. %B can be positioned above, below or behind the price plot. Click here to see a live example of %B.

Suggested Scans

%B Uptrend Scan

This scan filters out stocks where %B is above .80 and MFI just crossed above 80. According to Bollinger, these stocks could be starting new upswings. This scan is just a starting point; further refinement and analysis are required.

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%B Downtrend Scan

This scan filters out stocks where %B is below .20 and MFI just crossed below 20. According to Bollinger, these stocks could be starting new downswings. This scan is just a starting point; further refinement and analysis are required.

For more details on the syntax to use for %B scans, please see our Scanning Indicator Reference in the Support Center.

Bollinger Band® Definition

What Is a Bollinger Band®?

A Bollinger Band® is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security’s price, but which can be adjusted to user preferences.

Bollinger Bands® were developed and copyrighted by famous technical trader John Bollinger, designed to discover opportunities that give investors a higher probability of properly identifying when an asset is oversold or overbought.

Key Takeaways

  • Bollinger Bands® are a technical analysis tool developed by John Bollinger for generating oversold or overbought signals.
  • There are three lines that compose Bollinger Bands: A simple moving average (middle band) and an upper and lower band.
  • The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average, but can be modified.

Understanding Bollinger Bands

How To Calculate Bollinger Bands®

The first step in calculating Bollinger Bands® is to compute the simple moving average of the security in question, typically using a 20-day SMA. A 20-day moving average would average out the closing prices for the first 20 days as the first data point. The next data point would drop the earliest price, add the price on day 21 and take the average, and so on. Next, the standard deviation of the security’s price will be obtained. Standard deviation is a mathematical measurement of average variance and features prominently in statistics, economics, accounting and finance.

For a given data set, the standard deviation measures how spread out numbers are from an average value. Standard deviation can be calculated by taking the square root of the variance, which itself is the average of the squared differences of the mean. Next, multiply that standard deviation value by two and both add and subtract that amount from each point along the SMA. Those produce the upper and lower bands.

Here is this Bollinger Band® formula:

What Do Bollinger Bands® Tell You?

Bollinger Bands® are a highly popular technique. Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. John Bollinger has a set of 22 rules to follow when using the bands as a trading system.

In the chart depicted below, Bollinger Bands® bracket the 20-day SMA of the stock with an upper and lower band along with the daily movements of the stock’s price. Because standard deviation is a measure of volatility, when the markets become more volatile the bands widen; during less volatile periods, the bands contract.

The Squeeze

The squeeze is the central concept of Bollinger Bands®. When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade. However, these conditions are not trading signals. The bands give no indication when the change may take place or which direction price could move.

Breakouts

Approximately 90% of price action occurs between the two bands. Any breakout above or below the bands is a major event. The breakout is not a trading signal. The mistake most people make is believing that that price hitting or exceeding one of the bands is a signal to buy or sell. Breakouts provide no clue as to the direction and extent of future price movement.

Limitations of Bollinger Bands®

Bollinger Bands® are not a standalone trading system. They are simply one indicator designed to provide traders with information regarding price volatility. John Bollinger suggests using them with two or three other non-correlated indicators that provide more direct market signals. He believes it is crucial to use indicators based on different types of data. Some of his favored technical techniques are moving average divergence/convergence (MACD), on-balance volume and relative strength index (RSI).

Because they are computed from a simple moving average, they weight older price data the same as the most recent, meaning that new information may be diluted by outdated data. Also, the use of 20-day SMA and 2 standard deviations is a bit arbitrary and may not work for everyone in every situation. Traders should adjust their SMA and standard deviation assumptions accordingly and monitor them.

Bollinger Bands В® Explained – The Best Trading Indicator

Bollinger Bands В® Explained – The Best Trading Indicator

Bollinger Bands В® are among the most reliable and potent trading indicators traders can choose from. They can be used to read the trend strength, to time entries during range markets and to find potential market tops. The indicator is also not a lagging indicator because it always adjusts to price action in real time and uses volatility to adjust to the current environment.

In this article, we show you how to use Bollinger Bands В® to improve your chart reading skills and how to identify high probability trade entries.

Bollinger BandsВ В® explained 101

As the name implies, Bollinger Bands В® are price channels (bands) that are plotted above and below price.

The outer Bollinger Bands В® are based on price volatility, which means that they expand when the price fluctuates and trends strongly, and the Bands contract during sideways consolidations and low momentum trends.

By default, the Bollinger Bands В® are set to 2.0 Standard deviations which means that, from a statistical perspective, 95% of all the price action happens in between the channels. A move close to the, or outside of the outerВ Bollinger Bands В® shows a significant price move – more on that later.

The center of the Bollinger Bands В® is the 20-period moving average and the perfect addition to the volatility based outer bands.

Trend-trading with the Bollinger Bands В®

Bollinger Bands ® do not lag (as much) because they always change automatically with the price.

We can use the Bollinger Bands В® to analyze the strength of trends and get a lot of important information this way. There are just a few things you need to pay attention to when it comes to using Bollinger Bands В® to analyze trend strength:

  • During strong trends, price stays close to the outer band
  • If price pulls away from the outer band as the trend continues, it shows fading momentum
  • Repeated pushes into the outer bands that don’t actually reach the band showВ a lack of power

Chart analysis withВ Bollinger Bands В®

The screenshot below shows how much information a trader can pull from using Bollinger Bands В® alone. Let me walk you through the points 1 to 5:

1) Price is in a strong downtrend and price stays close to the outer bands all the time. This is a very bearish signal.

2) Price fails to reach the outer band and then shots up very strongly. Suddenly failing to reach the bands can signal fading momentum.

3) 3 swing highs with lower highs: the first swing high reached the outer band whereas the following two failed. A bearish signal.

4) A strong downtrend where price stayed close to the outer band. It tried to pull away, but bears were always in control.

5) Price consolidates sideways, not reaching the outer band anymore and the rejection-pinbar ended the downtrend.

As you can see, the Bollinger Bands В® alone can provide a lot of information about trend strength and the balance between bulls and bears.

Finding tops and bottoms with Bollinger Bands В®

We highly recommend combining the Bollinger Bands ® with the RSI indicator – it’s the perfect match. There are two types of tops that you need to know about:

1) After a trend move, price fails to reach the outer Band as the uptrend becomes weaker. This signal is usually accompanied by an RSI divergence

2) During a consolidation, price spikes into the outer Bands which get rejected immediately

The screenshot below shows both scenarios. The first is the top after a divergence. You can see how the trend became weaker and then eventually failed to reach the outer Band before reversing. I marked the second spike with an arrow which was a trend continuation signal as price failed to break higher during the downtrend. The strong spike that was followed by a fast rejection showed that bulls lacked power.

В

You can see that the Bollinger Bands В® are a multi-faceted trading indicator that can provide you with lots information about the trend, buy/seller balances and about potential trend shifts. Together with the moving average and the RSI, Bollinger Bands В® make for a great foundation for a trading strategy.

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