Indicators Derived From Bollinger Bands
In Spring of 2010, John Bollinger introduced three new indicators based on Bollinger Bands. They are BBImpulse, which measures price change as a function of the bands, percent bandwidth (%b), which normalizes the width of the bands over time, and bandwidth delta, which quantifies the changing width of the bands.
%b (pronounced "percent b") is derived from the formula for Stochastics and shows where price is in relation to the bands. %b equals 1 at the upper band and 0 at the lower band. Writing upperBB for the upper Bollinger Band, lowerBB for the lower Bollinger Band, and last for the last (price) value:
- %b = (last − lowerBB) / (upperBB − lowerBB)
Bandwidth tells how wide the Bollinger Bands are on a normalized basis. Writing the same symbols as before, and middleBB for the moving average, or middle Bollinger Band:
- Bandwidth = (upperBB − lowerBB) / middleBB
Using the default parameters of a 20-period look back and plus/minus two standard deviations, bandwidth is equal to four times the 20-period coefficient of variation.
Uses for %b include system building and pattern recognition. Uses for bandwidth include identification of opportunities arising from relative extremes in volatility and trend identification.
Read more about this topic: Bollinger Bands
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