The Percent B (%B) indicator is a simple momentum oscillator that has been derived from Bollinger Bands indicator. Bollinger Bands are a function of price and are plotted directly on the price chart. However, this does not give us a relative positioning of price with respect to the bands.
In this article we will cover :
How %B indicator works
Identifying Trades with %B
How to Calculate %B Indicator
%B tells us where we are in relation to the Bollinger Bands. Bollinger %B describes where the most recent close falls within the range created by the Upper and Lower Bollinger Bands or the degree to which the close falls outside the range created by the Upper and Lower Bollinger Bands. It is calculated using an adaptation of the formula for Stochastics.
How %B indicator works
There are 7 significant indications one can get from the %B indicator:
- %B Above 1 = Price is Above the Upper Band
- %B Equal to 1 = Price is at the Upper Band
- %B Above .50 = Price is Above the Middle Line
- %B Equal to .50 = Price is at the Moving Average
- %B Below .50 = Price is Below the Middle Line
- %B Equal to 0 = Price is at the Lower Band
- %B Below 0 = Price is Below the Lower Band
Identifying Trades with %B
- During up trends watch for %B to reach oversold levels for possible buying opportunities.
- During down trends watch for %B to reach overbought levels for possible short sale opportunities.
- 0.80 and 0.20 are also significant levels where the price is approaching the upper and lower bands respectively.
- Percent B has many uses like identification of divergences and pattern recognition. Advanced traders can also use it for coding trading systems using Bollinger Bands.
How to Calculate %B Indicator
%B = [(Price – Lower Band) / (Upper Band – Lower Band)] * 100
Conclusion
Percent B is useful, as it makes a more intricate use of Bollinger Bands possible. Instead of relying on the appearance of price in relation to the Bands, we can use exact values to help make more informed decisions. Percent B should be used in conjunction with additional indicators to help confirm over trend direction.
