• Bollinger Bands and the other indicators associated with it, create interesting and powerful trading systems.
  • Using the %B indicator can give a more accurate read on whether price will continue through a zone or reverse.

Bollinger Bands and the %B indicator

                The great John Bollinger is the man behind one of the most well-known indicators known as Bollinger Bands. They are a form of a ‘band’, which are very similar to channels. Very simply, Bollinger Bands are an indicator used to measure volatility. But Mr. Bollinger’s tools are not limited to just the overlay known as ‘Bollinger Bands’ – there are a number of indicators and tools in Bollinger’s arsenal that he has created. One of the most important – and one of my favorites – is the %B indicator. See the image below.

 

On the image above, we see the Bollinger Bands on Bitcoin’s daily chart along with the %B indicator just below. One of the key behaviors that traders look for when using Bollinger Bands is the ‘squeeze’ – also called the Bollinger Squeeze, BB Squeeze and a myriad of other nicknames. When the upper and lower bands constrict, this is showing us that the market has become less volatile. When the upper and lower bands expand and form a kind of bubble, this means that volatility has entered the market and we often see explosive and sustained moves. However, I’ve never been the best at using the Bollinger Band overlay as a good indicator of whether a move outside the Bollinger Bands is a good entry or not – it’s just not the kind ‘visual’ cue that works for me. That’s where the lower indicator comes in, the %B. And that is where the strategy begins.

%B and RSI Strategy

                Note: I have borrowed this strategy from Mr. John Bollinger’s work in his book Bollinger on Bollinger Bands. The key difference here is that this original strategy used the MFI instead of the RSI – volume in crypto’s is something of a wild variable, so I have stuck with just the RSI.

Here’s a tip: the default settings of the %B indicator on TradingView are wrong. I change the overbought and oversold levels to 0.8 (from 1) and 0.2 (from 0). Also – the name of these levels is not really the best and can give new traders a little bit of a confused and costly image of how to trade these levels. This may seem counter-intuitive, but when the %B line crosses above 0.8 we want to long and when it crosses below 0.2 we want to short. Look at Cardano’s (ADA) chart below.

The blue vertical lines show where the cross above the 0.8 level occurred and initiated a probably buy signal. However, the %B crossing that level is not enough of a justification to enter. That’s where the RSI comes in. Now let’s look at the chart below.

The chart above shows an example of short setups while using the RSI. I use the RSI to gauge whether an entry based on the %B is appropriate. For a long trade, I will only go long if the RSI is below 60. For a short trade, I will only go short if the RSI is above 40. The reason for this is it keeps me out of taking a trade near the end of a move. Observe the chart above and see where these short entries would have been made when the %B crossed below 0.2 and the RSI was above 40 at the same time. These generated powerful sell signals that had a significant amount of sustained momentum behind them. But the question is: when do I exit? I often leave these trades early, but a rule of thumb is to wait until the RSI has moved into an overbought or oversold condition. If I were long, I would remain in the trade until the RSI was overbought and I would do the inverse for the short side.

In summary, here are the rules:

  1. Buy when %B crosses above the 0.8 and the RSI is below 60.
  2. Take profit when the RSI reaches an overbought condition on the RSI.
  3. Short when %B crosses below 0.2 and the RSI is above 40.
  4. Take profit when the RSI reaches an oversold condition on the RSI.