Bollinger Bands (%B)

Understand the Bollinger volatility envelope and the %B measure the app uses to locate price within it.

The essentials

Bollinger Bands form an envelope around price: a moving average in the middle, flanked by an upper band and a lower band calculated from the standard deviation of recent prices. The more volatile the market, the wider the bands spread apart; the calmer it is, the more they contract.

The %B value shows where price sits relative to that envelope: at 0, price is touching the lower band; at 1, it is touching the upper band; at 0.5, it sits exactly on the central moving average.

%B below 0.2: price is close to the lower band, which is treated as a bullish signal.
%B above 0.8: price is close to the upper band, which is treated as a bearish signal.
Between 0.2 and 0.8: price is moving through the middle of the envelope, with no strong signal from this indicator.

In the app, this signal feeds the confluence score: %B below 0.2 pushes the score toward bullish, and %B above 0.8 pushes it toward bearish.

Touching a band is not a buy or sell signal by itself. In a strong trend, price can ride along a band for a long time without reversing. Never make a decision based on this indicator alone.

Going further: the squeeze

When the bands contract sharply, this is called a squeeze: volatility is unusually low. This contraction often precedes an expansion in volatility, meaning a larger-than-normal price move, whether up or down.

A squeeze says nothing about the direction of the coming move, only about its likely size. It should therefore be combined with other signals to get a sense of where the next move might head.

Expert: standard deviation, mean reversion and breakout

By default, the bands are calculated over 20 periods, with a standard deviation multiplied by 2 on each side of the moving average. Shortening the period or the multiplier makes the bands narrower and more reactive, but also more prone to false signals.

Two readings sit in structural tension with each other. The mean-reversion reading assumes that once price moves away from the middle, it tends to return toward the central band, making a touch of an extreme band a potential reversal opportunity. The breakout reading assumes the opposite: in a strong trend, price can ride along a band for an extended period, which would invalidate an early reversal bet. Market context determines which of the two readings is more relevant at any given moment.