What Is the %B Indicator?

The price of a securities is measured by the %B Indicator in relation to the upper and lower Bollinger Bands. It can be used to determine the strength of a trend and spot overbought or oversold situations. It can assist you in identifying entry points inside a particular trend when combined with other indicators, such as the Money Flow Index (MFI). All things considered, the %B is a flexible instrument that can improve your capacity to assess and react to markets.

There are six basic relationship levels:

%B is below 0 when price is below the lower band
%B equals 0 when price is at the lower band
%B is between 0 and .50 when price is between the lower and middle band (20-day SMA)
%B is between .50 and 1 when price is between the upper and middle band (20-day SMA)
%B equals 1 when price is at the upper band
%B is above 1 when price is above the upper band

How Do You Calculate the %B Indicator?

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%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 two 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.

Signals: Overbought/Oversold

%B can be used to determine when a market is overbought or oversold. Knowing when to look for overbought versus oversold signals is crucial, though. When the medium-term trend is up, it is best to search for short-term oversold situations; when the medium-term trend is down, it is best to search for short-term overbought situations, as is the case with most momentum oscillators. Stated differently, seek out opportunities that align with the larger trend, such as a reversal within a larger uptrend. Before searching for overbought or oversold readings, you need to identify the larger trend.

Apple (AAPL) is in a strong uptrend, according to Chart 1. %B repeatedly rose above 1, but these “overbought” readings were unable to generate profitable sell signals. Apple reversed far above the bottom range and resumed its upward trend, resulting in shallow pullbacks. When there is a strong trend, John Bollinger talks about “walking the band.” This relates to the idea that prices might move up the upper band and hardly ever touch the lower band during a strong upswing. On the other hand, prices may wander along the lower band during a steep slump and hardly ever touch the upper band.

Chart 1

After identifying a bigger uptrend, %B can be considered oversold when it moves to zero or below. Remember, %B moves to zero when price hits the lower band and below zero when price moves below the lower band. This represents a move that is 2 standard deviations below the 20-day moving average.

Chart 2 shows the Nasdaq 100 ETF (QQQQ) within an uptrend that began in March 2009. %B moved below zero three times during this uptrend. The oversold readings in early July and early November provided good entry points to partake in the bigger uptrend (green arrows).

Chart 2

Signals: Trend Identification

John Bollinger used the Money Flow Index (MFI) and %B to describe a trend-following system. When MFI(10) is over 80 and %B is above.80, an uptrend starts. The range of MFI is zero to one hundred. MFI(10) is in the top 20% of its range when it moves above 80, which is a strong reading. When MFI(10) is below 20 and %B is below 0.20, downtrends are detected.

FedEx (FDX) with %B and MFI(10) is displayed in Chart 3. When MFI was above 80 and %B was above 0.80 in late July, an upward trend began. In early September and mid-November, two additional indications confirmed this upward pattern. Traders would probably have struggled with the risk-reward ratio following such significant moves, even though these signals were useful for identifying trends. To simultaneously boost %B above 0.80 and MFI(10) above 80, a significant price spike is required. In order to find better entry points, traders may want to use this technique to determine the trend and then search for suitable overbought or oversold levels.