Bollinger Bands are a technical indicator that is used to measure the volatility of a security. They were developed by John Bollinger in the early 1980s and consist of a moving average and two standard deviation lines. The moving average is typically set to a 20-day period and the standard deviation lines are set to two standard deviations above and below the moving average.
The Bollinger Channel Percentage Bands (BCPB) is a variation of Bollinger Bands that uses a percentage value instead of standard deviation to calculate the upper and lower bands. This can help to ensure that the bands are more representative of the volatility of the security over a longer period of time, since the standard deviation can change with the price level.
The BCPB is calculated by taking the moving average, and then adding and subtracting a certain percentage of the moving average to form the upper and lower bands. This percentage is typically set to 2% but can be adjusted to suit the trader's preference.
The Bollinger Channel Percentage Bands can be used in several ways to generate trading signals. One of the most common ways is to look for price action that touches or crosses the upper or lower band of the channel. When the price touches or crosses the upper band, it generates a sell signal, and when the price touches or crosses the lower band, it generates a buy signal.
Another way to use Bollinger Channel Percentage Bands is to look for divergences between the BCPB and price action. When the price is making new highs or lows while the BCPB are failing to do so, it can be a signal of a potential trend reversal.
It's important to note that Bollinger Channel Percentage Bands are a volatility indicator and they are a lagging indicator, which means that they are based on past price data and may not always provide accurate predictions about future price movements. As with any indicator, it is best to use BCPB in conjunction with other indicators and analysis techniques to confirm signals and get a better understanding of the market conditions.
Keep in mind that Bollinger Channel Percentage Bands (BCPB) is a variation of Bollinger Bands that uses a percentage value instead of standard deviation to calculate the upper and lower bands, which can help to ensure that the bands are more representative of the volatility of the security over a longer period of time. It's important to use the BCPB in conjunction with other indicators and analysis techniques to confirm signals and get a better understanding of the market conditions. Additionally, it's important to note that the percentage value used to calculate the upper and lower bands can be adjusted to suit the trader's preference, and it's important to find the percentage value that works best for the security you are analyzing.