Monday, February 17, 2014

Bollinger bands and indicators

  • %b is derived indicator form BB, first,%b,tells us where the price is in relation to the Bollinger Bands and is the key to linking of price and indicator action. The formula evaluates to 1.0 when the last price is at the upper band,0.5 at the middle band,and 0.0 at the lower band.
It will exceed 1 when the last price is above the upper band or will fall beneath zero when the last price is below the lower band. At 1.1 it says that we are 10 percent of the BandWidth above the upper band,and at 0.15 it says that we are 15 percent of the BandWidth below the lower band.
%b is a truly relative tool, it tells only where we are in relation to the framework created by the Bollinger Bands. 
  • BandWidth,tells us how wide the bands are. BandWidth is the key to The Squeeze and can play an important role in spotting the beginnings and ends of trends.
BandWidth is most useful for identifying The Squeeze,that situation where volatility has fallen to such a low level that its very lowness has become a forecast of increased volatility. The simplest approach to this is to note when BandWidth is at a six-month low.
An important use of BandWidth is to mark the beginning of directional trends,either up or down. Many trends are born in trading ranges when the BandWidth is quite narrow. A breakout from the trading range that is accompanied by a sharp expansion in BandWidth is often the mark of the beginning of a sustainable trend.
A strong trend will cause a large expansion in volatility that causes the bands to spread dramatically,so much so that the band on the other side of the trend—e.g.,the lower band in an uptrend—will head in the direction opposite to the trend. When that band reverses—turns back up in this case—that leg of the move is at an end. This also can be seen and enumerated in BandWidth. The idea is when BandWidth flattens out or turns down enough to reverse the direction of the Bollinger Band on the opposite side of the trend,the trend is at an end.