Stocks Technical Analysis Indicators Part 5

Bollinger %b Oscillator

Bollinger Bands were created by John Bollinger and are described in his book “Bollinger on Bollinger Bands”.

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Figure 5.13: Bollinger Bands consist of three curves drawn in relation to price data.

The Bollinger Bands in figure 5.13 consist of a set of three curves drawn in relation to price data. The middle band usually is a simple 20-bar moving average, which serves as the base for the upper and lower bands.

Middle Bollinger Band = 20-period simple moving average
Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard deviation
Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard deviation

The use of standard-deviation bands is a method to measure price volatility.

With trending prices, the bands will be wider as a result of the higher volatility in price, whereas consolidation-period bands will be narrower as a result of smaller price moves.

I am not using Bollinger bands; instead, I use %b, a measure of where the last price is in relation to the bands.

Bandwidth is used for volatility-based trading opportunities; %b is strongly influenced by volatility, and we use it as an oscillator to show overbought and oversold situations, preferably looking at divergences.

We do not get the best %b indicator by using closing prices, but by using heikin-ashi average closing prices. We also are not using a simple moving average, but a weighted moving average for a faster short-term response.

This is the MetaStock® formula for the heikin-ashi Bollinger Bands %b indicator:
We call this function SVE_BB%b_HA:
{SVE_BB%b_HA}
peri:=Input("Average period: ",2,100,18);
haOpen:=(Ref((O+H+L+C)/4,-1) + PREV)/2;
haC:=((O+H+L+C)/4+haOpen+Max(H,haOpen)+Min(L,haOpen))/4;
SVE_BB%b_HA:=((haC+2*Stdev(haC,peri)-Mov(haC,peri,W))/(4*Stdev(haC,peri)))*100;
SVE_BB%b_HA

I use standard an 18-bar SVE_BB%b_HA.

Figure 5.14: SVE_BB%b_HA leading indicator.

As you can see in figure 5.14, the indicator is leading  most of the time, showing high levels, low levels, and divergences prior to turning points in price movement.

It is a fast and useful indicator used in combination with the other indicators.

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