Bollinger bands are some of the most popular and prolific technical indicators used in binary options trading. For a long time, traders have used moving averages and envelopes, also known as ‘bands,’ to assess the direction of financial markets.
How to Apply the Bollinger Band Strategy to Binary Options Trading
However, John Bollinger, a technical financial analyst, enhanced the effectiveness of moving averages and popularized the Bollinger technical strategy.
Why is the Bollinger Band strategy so popular?
Novice binary options traders often have a hard time analyzing and interpreting consolidations. Bollinger Bands are an easier way of interpreting compression trends. Most new traders do not have solid spatial pattern recognition capabilities too. Bands can help to simplify compression patterns.
Compared to other strategies, Bollinger Bands are much more effective as they inflate and compress simultaneously with the price of the underlying asset. As such, it becomes easier to observe as the price range of a consolidation tightens.
Compression takes place before a call option or put option move. Generally, the greater the compression, the greater the move. To be able to leverage the expanding and compression patterns, you need to be able to read charts and statistical data.
How the Bollinger Strategy Works
Simple moving averages are applicable to the Bollinger band strategy. 20-periods are generally the usual period for the moving average.
Shorter moving averages are typically significantly impacted by short term fluctuations in the price of the underlying asset. At the same time, longer moving averages are less prone to market fluctuations.
As a novice, it is best to work with the period set by the platform before advancing to other longer periods. This is the best way to learn how to apply the Bollinger strategy in your binary trading.
The moving average uses a similar number of periods as the bands below and on top of the moving average. However, two standard deviations separate the bands above and the ones below from the moving average. The breadth of the bands will be different each day due to fluctuations in the standard deviations. The standard deviations expand in a volatile market and compress in a less unstable market.
As such, Bollinger bands indicate the price of an asset in relation to its past proneness to volatility. So, if the price of the underlying market exceeds the band above the moving average, the price is exposed to greater volatility. On the other hand, if prices are lower than the band below the moving average, they are less prone to volatility.
On their own, Bollinger bands do not generate trading signals. However, they give you an indication of the prices of the underlying asset and their volatility in relation to their historical volatility.
In summary, Bollinger bands help a trader to:
·See how prices are compressing prior to a move
·Assess whether the consolidation is steady or uneven
·Develop spatial pattern recognition skills