Top Indicators to Combine with Bollinger Bands for Optimal Trading Insights

Bollinger Bands are essential tools for technical traders, helping to pinpoint breakout levels and accurately outline trading ranges while gauging market volatility.

These bands use standard deviation to plot upper and lower boundaries around a stock’s moving average. To enhance analysis, several specialized indicators have been designed to complement Bollinger Bands, offering deeper insights into trend reversals and price breakouts. Among the most popular are BandWidth, %b, and BBTrend—all developed by John Bollinger himself.

Key Highlights

• BandWidth measures the distance between the bands relative to the middle band, enabling traders to detect Bollinger Squeezes.
• The %b indicator expresses the stock’s closing price as a percentage between the upper and lower bands, helping to spot when prices cross band thresholds.
• BBTrend indicates both the direction and strength of a trend, serving as a powerful alternative to the average directional index (ADX).

How to Use the BandWidth Indicator

BandWidth (BW) quantifies the relative width between Bollinger Bands and the middle band. Traders watch for the Bollinger Squeeze—a pattern marked by narrow bands indicating low volatility.

To calculate the Squeeze: (Upper Band over 20 periods – Lower Band over 20 periods) ÷ Middle Band over 20 periods.

Visually, the Squeeze appears as the upper and lower bands tightening around the middle band. This pattern signals an upcoming surge in volatility. When combined with other indicators like the accumulation/distribution line, traders can anticipate breakout direction. For instance, if prices are declining but accumulation/distribution trends upward, it suggests a bullish breakout is imminent.

Applying the %b Indicator

The %b indicator represents the stock’s closing price as a fraction between the Bollinger Bands. By definition, the upper band equals 1.0, the middle band 0.5, and the lower band 0.

For example, if the upper band is $30 and the current price is $22.50, %b is 0.75—indicating the price is 75% of the way toward the upper band. This metric assists traders in spotting when prices breach bands, which can signal divergences or trend shifts.

Leveraging the BBTrend Indicator

BBTrend, a newer indicator crafted by John Bollinger, uniquely identifies both trend direction and momentum. It is calculated as follows:

lower = abs(lowerBB(20) – lowerBB(50))
upper = abs(upperBB(20) – upperBB(50))
BBTrend = (lower - upper) ÷ middleBB(20)

A BBTrend value above zero indicates a bullish trend, while a value below zero signals bearish momentum. The magnitude of the reading reflects the trend’s strength. BBTrend serves as a robust alternative to the ADX, providing traders with a clear picture of market dynamics.

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