In binary options trading, price plays an essential factor. That’s because, as a trader, you need to speculate whether the price of a given asset will increase or decrease. But besides the price, there are other important aspects of binary options trading, like volume and volatility.
Volatility in trading is a way of analyzing the change in the value of an asset in a given time. An asset whose price moves up and down is considered more volatile than an asset whose price stays flat.
The price of an asset or a binary option is strongly affected by its volatility. That means more volatile assets have a high price and the assets with low volatility have less price.
Although volatility is an important factor in binary options trading, traders tend to avoid it. And this thing makes them lose huge money.
If you want to understand how to apply volatility to binary options or know about the indicators used for measuring volatility, read this guide.
How to apply volatility to Binary Options?
It’s important to understand volatility before entering the binary options market because volatility means movement, and movement can result in large profits.
Here are two different ways you can apply volatility.
For the first way, you can search the asset and list them based on volatility.
You can invest your money in a highly volatile asset if you like to take risks. If your speculations for a highly volatile asset are correct, you will win the amount. Otherwise, you will lose your money.
If you want to play safe, you can choose an asset with limited volatility. Less volatile asset means less profit, but it also means limited loss.
The second way to apply volatility to binary options is by choosing an asset and sticking to it. In this case, you must adjust your strategy as volatility changes.
By analyzing market volatility, you can also know about the short-term market cycle to make profitable entry points and adjust your strategies.
When an asset’s volatility is low, you can buy by choosing either put or call option depending on the situation. You should buy an asset because you can get better positions at better rates of profitability.
How is the price of Binary Option affected by Volatility?
No matter which situation you use for applying volatility, it affects the price of binary options. Here’s a quick example.
Suppose you have purchased silver that has a strike price of $1200. The underlying silver futures market has a value of $1190. It shows that your position in the market is Out of The Money.
If you want to get a full payout, the value of silver should increase by $10 before the asset expires. Here, the possibility of silver expiring In the Money depends on its volatility.
If silver has been trading in the large range all day, with high price swings, that means the possibility is high. However, if silver has a small range all day, the probability is less.
What Are Volatility Indicators?
Volatility indicators can be seen as technical indicators that you can use to understand the nature of the trading market. Indicators use market movement, data of the past, and a formula to show what will happen in the market.
Volatility indicators are different from usual trading indicators as they help you understand how far an asset has moved from its directional value.
An asset with low volatility shows a strong sense of direction. However, a highly volatile asset moves away from its average direction.
Different Indicators for Measuring Volatility
Volatility indicators are divided into two categories, i.e., channels and oscillators.
It is used to calculate the value of an asset. The data that the oscillator generates is drawn into a separate chart. It uses current value and past value for speculating what traders are thinking and what will be the market’s mood shortly.
Oscillator Style Indicator
Here are a few popular and useful oscillator-style indicators.
This oscillator style indicator shows how much the price of an asset has moved in relation to its past value. This indicator moves between 0 to 100.
One interesting thing about Relative Volatility is that it measures market strength. Besides this, you can also use it as a confirmation of other signals.
You can use this indicator to measure volatility as a movement between open and close. Also, it does not have gaps.
It shows the top and bottom of a trend and is used as a confirmation of other tools and indicators.
Average True Range
Average True Range is the most accurate volatility oscillator indicator that you can use. With this indicator, you can understand how far the average period of an asset has moved. It also eliminates market gaps by identifying them in the calculations.
This indicator use volatility for calculating price channel. The data generated by channels is drawn directly into the chart. It predicts the range in which the market will stay by surrounding the current market price.
Channel Style Indicator
Just like the oscillator indicator, here’s a popular channel indicator.
Bollinger Bands is an excellent channel indicator that creates a price channel around the current market price. It consists of three lines, i.e., moving average line in the middle and upper and lower line on the standard deviations.
This indicator predicts whether the market will drop down to the lower line or stay at the upper line. The middle line indicates resistance or support.
Volatility plays a vital role in binary options trading, and you must not ignore it. By using volatility indicators for binary options trading, you can double your profits. That’s because indicators help in predicting the movement of the market.
You can even combine oscillator and channel indicators to generate accurate information. Once you have the data, you can develop a helpful trading strategy to win binary options trades.
All in all, volatility is an essential factor, and you must know how to apply volatility to binary options to increase your profits.