| Characteristic: | Dynamic Momentum Indicator | ||
| Parameter Defaults: | MA Period | 20 | controls the measurement period for the average |
| Std Deviation | 2 | controls the placement of the bands around the average | |
| Plots: | BLG %B | ||
In recent years the use of Bollinger Bands has become popular and there has been a greater emphasis on identifying the chances of one band containing price rather than penetrating the band in a trend. The identification of trend reversals is also handled by Bollinger B%.
The formula is:
| BLG B% = | (Close – Band Low) | |
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| (Band high – Band Low) |
Basically this is an almost identical formula to that for stochastics – comparing the percentage position of current price within the recent range, only in the case of Bollinger B%, the range is measured by the bands rather than price. Clearly, while stochastics will always oscillate in a range between zero and 100 since price can never penetrate above the price range (else it will increase the price range itself), price does penetrate the Bollinger Bands on quite frequent occasions. Thus Bollinger B% can move above 100 and below zero, this merely indicating that the close is outside of the bands.
Perhaps the most useful feature of Bollinger B% is the use of divergences. There is a common occurrence with Bollinger Bands for price to penetrate the bands during a directional move, then on a new price extreme fail to penetrate the band again. This causes a divergence of price against the indicator and can be an early signal of reversal. Also note from the chart displayed how trend lines can be drawn on the indicator itself, breach of the line indicating a change in price direction.
