How to Use Bollinger Bands in Binary Options Trading
Many traders have devised binary options strategies based on the Bollinger Bands® because they have an impressive reputation for identifying quality trading opportunities. In addition, this technical indicator performs well with most binary options types, including Range, Touch and the basic UP/DOWN, etc.
What exactly are the Bollinger Bands and why are they so effective? Here is a brief introduction that will provide you with the necessary insights. John Bollinger created his Bollinger Bands (BBs) at the start of the 1980s. He detected a need for adaptable bands after deducing that volatility had a dynamic behavior as opposed to a static one which was the popular belief at that time. You can exploit the Bollinger Bands to provide you with clear assessments about how the high and low values of assets interrelate over a specified time period. Price records low values at the lower band while registering high figures at the upper one.
As such, the BBs can help you formulate quality decisions by allowing you to compare price movements with the alerts generated by other technical indicators. If you analyze the following chart then you will observe that the BBs consist of three lines (blue) that monitor price. The middle band represents a simple-moving-average and functions as a foundation for the lower and upper bands.
You must also appreciate that the distance between the upper and lower bands is proportional to volatility levels. As such, you can primarily deploy the BBs to assess the current strength of volatility. Essentially, the BBs provide strong indications about whether the current level of volatility is presently high or low. For instance, you will note that the bands converge when volatility is low and diverge whenever the level of volatility increases. You can detect these formations on the above diagram.
For example, the upper and lower bands converge at the center of the chart when price is range trading. In contrast, the bands widen towards the right and left of the chart indicating higher levels of volatility. If you concentrate on these particular features, then you can optimize your skills at utilizing the BBs well. You do not even need to know how the BBs are calculated.
However, you should note carefully that price has a strong bent to always fluctuate about the central band. You should be able to detect that this specific feature occurred numerous times in the above diagram. You must also appreciate that the upper band performs as a resistance while the lower band acts as a support. As such, price frequently ricochets against them as can be seen in the above diagram.
You will again attain superior results with the BBs when they are displayed on trading charts using the hourly time-frame or higher because of the improved statistics. You can build powerful binary options strategies based on the features of the BBs although you will need to take into consideration that they operate best under range-trading conditions.
Designing a Bollinger Band Strategy
Let us know consider how best to deploy the Bollinger Bands to trade binary options. Essentially, the BBs are a mean reversion indicator that can inform you whenever the price of an asset is overbought or oversold and ready to retract sharply. Specifically, the BBs generate a trading channel within which the price of a security resides for almost 95% of the time during any specified time period. This feature implies that whenever price pierces either the Upper or Lower Bollinger Bands then there is a strong possibility that it could undergo a significant reversal.
The following diagram presents the daily chart of the EUR/USD. This asset is presently range-trading with price oscillating between the Upper and Lower Bollinger Bands. As you can verify, sharp retractions occur whenever price hits one of these bands. Subsequently, you should aim to execute PUT options after you detect price hitting and then rebounding against the Upper Bollinger. Similarly, CALL options should be activated whenever price ricochets against the Lower Bollinger Bands. Numerous examples are displayed on the next chart.
Bollinger Bands strategies are also effective tools at identifying whenever assets breakout of restricted ranges and create new trends. The following diagram displays an example which is again based on the EUR/USD daily trading chart.
You can activate a Bollinger Bands Strategy by implementing the following procedure. Open the daily EURUSD trading chart and insert the Bollinger Bands by hitting the appropriate buttons on your trading platform. Identify both two prominent upper points and two lower ones using the Bollinger Bands. Draw a line through them which will become your break lines. The above diagram shows an example of a bearish setup with the break line passing through two lower points. The Bollinger Bands are represented in the above trading chart by the three prominent blue lines.
Entry conditions are defined as follows. Wait for either the center line of the Bollinger bands to climb above a bullish break line or for it to drop beneath a bearish break line. An example of the latter is shown in the above diagram. Use candlesticks as your confirmation indicator as follows. Open a CALL binary option after the bullish entry condition is achieved and the current candlestick closes above the break line. Similarly, open a PUT binary option after the bearish entry condition is satisfied and the current candlestick closes below the break line.
As you can verify by studying the above examples, Bollinger Bands strategies operate well under most market conditions, such as range-trading, breakouts and trending, etc. This is because they can provide you with clean and accurate entry conditions for new binary options. In addition, if you invest time in perfecting the usage of Bollinger Bands then you will be able to achieve consistent profits using most of the binary options types, such as Above/Below, Touch and Range.