Bollinger Percent (%B)

Technical Analysis, Studies, Indicators:

Bollinger Percent (%B)

Description

Bollinger Percent (%B), like Bollinger Bandwidth, is based on the Bollinger Bands indicator, which was developed by John Bollinger. The Bollinger Bands indicator was developed to measure a stock's volatility and Bollinger Bandwidth is used in technical analysis for the same purpose of volatility evaluation. However, Bollinger Percent is used to evaluate the strength of a price trend.

Technical Analysis

Even Bollinger Percent uses Stochastics formula, the difference between Bollinger Percent and Stochastics is that while Stochastics oscillates in a range between 0% and 100%, the Bollinger Percent may fall below 0% when the price breaks the lower band and drops below it or may rise above 100% when the price crosses the upper band and moves above it.

As mentioned above, Bollinger Percent calculates the current price location relative to the upper and lower Bands. As an example

• A Bollinger Percent reading of 50% means that the current price is exactly at the middle band;
• When the Bollinger Percent hits 100%, it means that the price is at the upper band level;
• When the Bollinger Percent drops to 0%, it tells us that the current price has dropped to the lower band level;
• Readings above 100% reveal that the price is moving above the upper band;
• Readings below 0% show that the current price has dropped below the lower band.

Overall, as mentioned above, Bollinger Bands are used to evaluate a stock's volatility. However, when it comes to development of a trading system, a system developer would realize very quickly that while this indicator is easy for visual analysis, it becomes quite complex, when it comes to mechanical implementation, to apply technical analysis to Bollinger Bands. That is when Bollinger Bandwidth and Bollinger Percent can become very handy. These two indicators are ideal to use in a trading system to evaluate a level volatility (a width between the upper and lower bands) and to define price trend strength.

When using the Bollinger Percent indicator in a trading system, following price trend strength evaluation rules are used:

• Bollinger Percent values above 50% during an up-trend is an indication of a strong up-trend.
• Bollinger Percent values below 50% during an up-trend is an indication of a weakening up-trend. The closer to zero it declines the higher odds of a reversal down.
• Bollinger Percent values below 50% during a down-trend is an indication of a strong down-trend.
• Bollinger Percent values above 50% during a down-trend is an indication of a weakening down-trend. The closer to 100% it rises the higher odds of a reversal up.
• Rising Bollinger Percent readings is a sign of an up-trend
• Falling Bollinger Percent readings is a sign of a down-trend.

These rules are straight forward and easy to use when a trader want to ride a trend or see when the risk of a reversal becomes critical.

As an example, an options trader who what to ride strong trends for short-period of time may build following simple trading system based on Bollinger Percent indicator:

• Buy Call options when %B crosses above 0 and close the position as soon as %B starts to decline.
• Buy Put options when %B crosses below 0 and close the position as soon as %B starts to advance.

The system above is maximum simplified and presented here as an example of using %B indicator, yet, it can be used as a skeleton around a trading strategy could be build.

Chart 1: S&P 500 Index (^SPX) chart - Bollinger Percent

Formula and Calculations

Bollinger Percent formula is

Percent B = ((Close - Bollinger Lower Band) / (Bollinger Upper Band - Bollinger Lower Band))*100

By V. K. for MarketVolume.com