Bollinger % B

Bollinger % B is derived from John Bollingers original Bollinger Bands indicator. % B defines the price of a trading instrument relative to the upper and lower Bollinger band. Six relationship levels can be outlined:

– if the close price is at the upper band of the Bollinger, then % B is 1
– if the close price is at the lower band of the Bollinger, then % B is 0
– if the close price is above the upper band of the Bollinger, then % B is above 1
– if the close price is below the lower band of the Bollinger, then % B is below 0
– if the close price is above the middle band of the Bollinger (20-day SMA), then % B is above 0.50
– if the close price is below the middle band of the Bollinger (20-day SMA), then % B is below 0.50

Bollinger % B is calculated as follows:

% B = ((Close Price – Bollinger Lower Band) / (Bollinger Upper Band – Bollinger Lower Band)) x 100

The default setting for % B is based on the default settings for Bollinger bands (20,2).

% B is used in order to identify overbought and oversold conditions. As with the majority of momentum oscillators, a trader should look for short-term oversold conditions, when the intermediate-term trend is a bull one. He/she should look for short-term overbought conditions, when the intermediate-term trend is a bear one.

When % B moves above 1, this is referred to as an overbought condition. When % B moves below 0, this is referred to as an oversold condition. At times, however, overbought and oversold readings may not generate reliable sell and buy signals. There may be a shallow pullback, after which the major trend may resume. John Bollinger describes a situation, when prices “walk the band” during strong trends. In a strong bull trend, prices can walk up the upper band and in rare cases touch the lower band. In a strong bear trend, prices can walk down the lower band and in rare cases touch the upper band.

Chart Source: VT Trader