The Bollinger Bands® %B (or Percent Bandwidth) is an indicator derived from the standard Bollinger Bands (BB). It is a technical indicator that shows the level at which the latest price is located within the Bollinger Bands channel. This indicator was developed to help confirm trends and distinguish overbought and oversold conditions.
Bollinger Bands® are a powerful technical analysis tool that helps traders gauge market volatility and predict price trends. If you’re new to Bollinger Bands, please read our previous article on Bollinger Bands - Introduction and key points.
If you are using this tool in your prop trading strategies, you may want to dive into our previous article on the four main patterns of Bollinger Bands® Squeeze, expansion, max bandwidth and bandwalk to help determine changes in or the continuation of the price trends of an asset.
In this article we will discuss how to use the Bollinger Bands® %B, a technical indicator derived from the Bollinger Bands to confirm trends.
1. Presenting the latest price position within the band
The Bollinger Bands %B is a technical indicator derived from the Bollinger Bands that shows the level at which the latest price is located within the Bollinger Bands channel. This indicator was developed to help confirm trends and identify overbought and oversold market conditions.
It is calculated using the following formula:
Bollinger Bands %B = (Closing Price - Support Line Value) / (Resistance Line - Support Line Value) x 100
Upper Band = +2σ Lower Band = -2σ
The Bollinger Bands %B value is 100 when the candlestick is at +2σ, 0 at -2σ, and 50 at the center MA line. For example, if the Bollinger Bands %B is 80, it means the price is 80% away from the lower band (or 20% away from the upper band).
Furthermore, if the price is above +2σ, the value will be greater than 100; if it is below -2σ, the value will be less than 0 (negative). For instance, if the Bollinger Bandwidth %B is 110, it indicates that the price is located 10% beyond the width of the channel (+2σ).
In the small boxes in the lower part of the chart in Figure 1, you can see the Bollinger Bandwidth %B and understand the relationship between the candlesticks and the Bollinger Bands. Beyond the ±2σ positions, you can observe values greater than 100 or less than 0.
Figure 1. Bollinger Bandwidth %B
2. Helping recognise the trend environment
When analysing charts using the Bollinger Bandwidth %B indicator, if the price level consistently fluctuates above 50, it means that the market is in an uptrend. Conversely, if the price level consistently fluctuates below 50, it indicates a downtrend. Furthermore, if the price continues to fluctuate in a narrow range above 75, it suggests a strong upward movement, while if it continues in a narrow range below 25, it indicates a strong downward movement.
Figure 2. Understanding the market trend conditions through the Bollinger Bandwidth %B indicator
3. Price and divergence with Bollinger Bands %B
When using the Bollinger Bands %B indicator to analyse charts, it is also important to pay attention to divergence. Divergence refers to the phenomenon where the price movement is opposite to the movement of the Bollinger Bandwidth %B indicator, and it can be considered a strong signal of a market reversal.
When looking for divergence points for buying, draw a line between the Bollinger Bands %B indicator's lowest plotted points and the price valleys. If the price falls below the lowest plotted point in the BB but the Bollinger Bands %B breaks through the price low in a reverse trend, it indicates that the market trend will rise (blue arrow in Figure 3).
When looking for divergence points for selling, draw a line between the Bollinger Bands %B indicator's highest plotted points and the price's high. If the price breaks above the highest plotted point in the BB but the Bollinger Bands %B is below the price high showing a reverse trend, it indicates that the market trend will decline (orange arrow in Figure 3).
Figure 3. Divergence
4. Key differences between the Bollinger Bandwidth (BBW) and Bolling Bands %B (%B) indicators
Many of you may be familiar with the Bollinger Bandwidth (BBW) indicator which is more prevalent in trading set-ups. If you need a refresher on that, we have previously discussed it in Bollinger Bands® - Patterns 101 .
The Bollinger Bands %B (%B) is not a commonly used indicator and may be confused with the general Bollinger Bandwidth indicator. To help you differentiate the two tools and use them effectively, we’ve summarised the key differences below:
Key differences between Bollinger Bandwidth (BBW) and Bolling Bands %B (%B).
Can Bollinger Bandwidth and Bolling Bands %B indicators be used together?
Yes, you can use Bollinger Bands %B and Bandwidth together because they give you different insights:
- %B shows where the price is within the bands (e.g., near the top, middle, or bottom).
- Bandwidth shows how wide or narrow the bands are, which tells you how calm or volatile the market is.
For example:
If the bands are narrow (low volatility) and %B is around the middle, the market might be quiet and ready for a big move.
If the bands are wide (high volatility) and %B is near the top or bottom, the market might be in a strong trend or getting tired.
Basically, %B tells you where the price is, and Bandwidth tells you how active the market is. Together, they help you spot potential breakouts or trends!
Summary
The Bollinger Bands %B is a technical indicator derived from the Bollinger Bands that shows the current price level within the bands. This indicator was developed to help confirm trend occurrences and identify a sense of market overheating (overbought or oversold conditions).
When analysing charts using the Bollinger Bands %B indicator, remember:
- If the price level consistently fluctuates above 50, the market is in an uptrend.
- If the price level consistently fluctuates below 50, it indicates a downtrend.
- If the price fluctuates in a narrow range above 75, it suggests a strong upward movement
- If the price stays in a narrow range below 25, it indicates a strong downward movement.
Apart from Bollinger Bands, there are many other technical analysis tools you can learn and use, such as correlation tool, sentiment tool, and currency strength tool. Incorporating these tools as part of your trading plan will enable you to analyse the markets more precisely and enhance your prop trading performance.
Besides tools and research, the journey to becoming a successful prop trader gets easier when you engage with fellow traders like yourself. Interacting with other traders can sharpen your skills and motivate you in your prop trading journey. A good community of traders may just make a difference to you passing the prop trading evaluations and becoming a funded trader.
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