# 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.

Opportunities to trade with the trend can present themselves when Breakthroughs occur in the opposite direction of the underlying trend. For example, when the general trend is moving upwards and the regular BB indicator is "Walking the Bands" by constantly crossing the upper band into the Oversold territory, brief %b breakthroughs below 0 might indicate a good buying opportunity inside of that greater uptrend.

#### 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.