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.

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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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