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Bollinger Bands %B (%B)

Definition

Bollinger Bands %B or Percent Bandwidth (%B) is an indicator derived from the standard Bollinger Bands (BB) indicator. Bollinger Bands are a volatility indicator which creates a band of three lines which are plotted in relation to a security's price. The Middle Line is typically a 20 Day Simple Moving Average. The Upper and Lower Bands are typically 2 standard deviations above and below the SMA (Middle Line). What the %B indicator does is quantify or display where price is in relation to the bands. %B can be useful in identifying trends and trading signals.

History

The creator of Bollinger Bands (BB), John Bollinger, introduced %B in 2010 almost 3 decades after the introduction of his Bollinger Bands.

Calculation

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

The basics

It is all about the relationship between price and the Upper and Lower Bands. There are six basic relationships that can be quantified.

In descending order from the Upper Band:

  1. %B Above 1 = Price is Above the Upper Band
  2. %B Equal to 1 = Price is at the Upper Band
  3. %B Above .50 = Price is Above the Middle Line
  4. %B Below .50 = Price is Below the Middle Line
  5. %B Equal to 0 = Price is at the Lower Band
  6. %B Below 0 = Price is Below the Lower Band

Generally speaking .80 and .20 are also relevant levels.

  1. %B Above .80 = Price is Nearing the Upper Band
  2. %B Below .20 = Price is Nearing the Lower Band

%B goes beyond just a visual inspection of price in relation to its location within Bollinger Bands (BB). It is a way of pinpointing its location and providing the technical analyst an exact value.

What to look for

Overbought/Oversold

It is typically best to look for trading signals generated by the %B during strong or clearly defined uptrends or downtrends. "Walking the Bands" is a situation when during a strong uptrend or downtrend, price frequently breaks through above the Upper Band (in an uptrend) or below the Lower Band (in a downtrend). When price is "Walking the Bands" these breakthroughs are not actual reversal signals. Price may indeed reverse somewhat but it often turns once again and resumes the overall trend.

Identifying when a Breakthrough signifies an actual trend reversal can be a difficult event pinpoint. This is mostly done through historical technical analysis and research. That being said, using %B to identify trading signals due to Overbought/Oversold conditions while staying within the overall trend is a little bit more straightforward.

Notice on the following chart:

  • The general trend is moving upwards.
  • %B moves above 1 several times. This indicates that price has broken through the Upper Band.
  • There are indeed slight reversals with price moving back towards the SMA (The Middle Line)and %B moving towards .50
  • However %B never breaks through 0. Price then rises and the uptrend continues.

Trading Signals can also be found using the same principles. Opportunities to trade with the trend can present themselves when Breakthroughs occur in the opposite direction of the underlying trend.

Notice on the following chart:

  • The general trend is moving upwards.
  • %B breaks through below 0 several times.
  • These Breakthroughs present buying opportunities.

Notice on the following chart:

  • The general trend is moving downwards.
  • %B Breaks through above 1 several times.
  • These Breakthroughs present selling opportunities.

Summary

What makes Bollinger Bands %B useful, is that it takes a very popular, well-known indicator (Bollinger Bands (BB)) and narrows the focus. Instead of relying on the appearance of prices in relation to the Bands, technical analysts can use exact values to help make more informed decisions. %B is at its most valuable during a well-defined trend. During a well-defined trend, breaks above 1 and below 0 become much more significant. Therefore %B should be used in conjunction with additional indicators or technical analysis methods to help confirm over trend direction.

Inputs


Length

The time period to be used in calculating the SMA which creates the base for the Upper and Lower Bands. 20 days is the default.

Source

Determines what data from each bar will be used in calculations. Close is the default.

StdDev

The number of Standard Deviations away from the SMA that the Upper and Lower Bands should be. 2 is the default.

Style


Bollinger Bands %B

Can toggle the visibility of Bollinger Bands %B as well as the visibility of a price line showing the actual current value of the Bollinger Bands %B. Can also select the Bollinger Bands %B line’s color, line thickness and visual type (Line is the default).

Overbought

Can toggle the visibility of a line indicating overbought levels. Can also select the line’s value, line thickness, value and visual type (dashes is the default).

Oversold

Can toggle the visibility of a line indicating oversold levels. Can also select the line’s value, line thickness, value and visual type (dashes is the default).

Precision

Sets the number of decimal places to be left on the indicator's value before rounding up. The higher this number, the more decimal points will be on the indicator's value.