BB %B - Indicator Formula

It is an indicator to facilitate the reading and understanding of the Bollinger bands, of which it is necessarily an integral part.

One of the most evident problems of the Bollinger bands is their inability to visually offer the price position within the bands themselves; often we see prices competing for a long time along the lower or upper band, before detaching themselves from it and taking the opposite direction: a trader who sells when reaching the Upper band or buys when reaching the Lower band, would probably exit the market prematurely.

It is basically the same discourse that can be made for the RSI once the indicator reaches the extreme ranges of oscillation (less than 30 or more than 70) is not said that prices react immediately in opposite directions.

The Bollinger %B gives an idea of how the price is positioned within the bands: it is in fact built as a ratio with the numerator the difference between price and Lower band and the denominator the difference between Upper and Lower band.

Formula:

Bollinger %B = Close – Lower band / Upper band – Lower band

The indicator that is obtained oscillates between zero and one hundred, even if it is not rare to read outside this typical range of oscillation; as you can see, the %B lends itself to a series of analyses and interpretations.

It can be followed as an indicator of Overbought/Oversold, similar to RSI, possibly taking advantage of extreme readings that can be signaled as prices become exacerbated. The indicator can also be used to look for the development of potential divergences. Often times they are used with the Bollinger bands because they compliment each other well.

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