Introduction
%B quantifies a security's price relative to the upper and lower Bollinger Band.
There are six basic relationship levels:
- %B equals 1 when price is at the upper band
- %B equals 0 when price is at the lower band
- %B is above 1 when price is above the upper band
- %B is below 0 when price is below the lower band
- %B is above .50 when price is above the middle band (20-day SMA)
- %B is below .50 when price is below the middle band (20-day SMA)
Calculation
%B = (Price - Lower Band)/(Upper Band - Lower Band)
The default setting for %B is based on the default setting for Bollinger Bands (20,2).
The bands are set 2 standard deviations above and below the 20-day simple moving average, which is also the middle band. Security price is the close or the last trade.
%B quantifies the relationship between price and Bollinger Bands.
- Readings above .80 indicate that price is near the upper band.
- Readings below .20 indicate that price is near the lower band.
Surges towards the upper band show strength, but can sometimes be interpreted as overbought. Plunges to the lower band show weakness, but can sometimes be interpreted as oversold. A lot depends on the underlying trend and other indicators. While %B can have some value on its own, it is best when used in conjunction with other indicators or price analysis.
The default parameters (20,2) are based on the default parameters for Bollinger Bands. These can be changed accordingly. 20 represents the simple moving average. 2 represents the number of standard deviations for the upper and lower band. %B can be positioned above, below or behind the price plot.
Better bollinger bands are different in calculation but the %b calculation is the same.
