BOLLINGER BAND INDICATORS

Two indicators can be derived directly from Bollinger Bands, %b and BandWidth. The first, %b, tells us where we are in relation to the Bollinger Bands and is the key to the development of trading systems via the linking of price and indicator action. The second, 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. Well tackle %b first and then BandWidth.

Table 8.1 shows the formula for %b. Note that 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. %b is not a bounded

Table 8.1 %b Formula1

(Last - lower BB)/(upper BB - lower BB)

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Figure 8.1 Bollinger Bands and %b, Nokia, 250 days. %b tells us where we are in relation to the bands.

formula. 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 (Figure 8.1).

%b allows you to compare the price action within the Bollinger Bands with the action of an indicator, such as a volume oscillator (Figure 8.2). For example, suppose you decided on the following system: when price closes outside the upper Bollinger Band and the 21-day Intraday Intensity (II) is negative, sell. To program such a system, you might write: If %b is greater than one and 21-day II is less than zero, sell. More on this in Part IV.

Another important use of %b is to aid pattern recognition (Figure 8.3). For example, suppose you wanted to build a system that says if a retest of the lows is successful, then buy the first strong up day. To program that we might write: If %b at the first low is less than zero and %b at the second low is greater than zero, then buy the next up day if volume is greater than its 50-day average and range is greater than its 10-day average. More on this in Part III.

Part II: The Basics

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Figure 8.2 Bollinger Bands, %b, and 21-day Intraday Intensity, non-confirmed low, Guilford Pharmaceuticals, 100 days. Note the close above the upper band simultaneous with a negative indicator-a classic sell.

Figure 8.3 Bollinger Bands and %b, W bottom, Sears, 100 days. Note the W bottom with a new low in price but not for %b.