• Category: Strategies

Bollinger Bands Strategy for binary options: when to buy a PUT or a CALL

Bollinger bands are technical indicators. Many traders have devised binary options strategies based on the Bollinger Bands because they have an impressive reputation for identifying quality trading opportunities. Let's take a look to the simplest and most profitable strategy for binary options based on the Bollinger Bands

WHAT ARE BOLLINGER BANDS

Bollinger bands are defined by three curves. The first curve calculates the moving average of a binary option’s price over period X, and two other curves are found on either side of the moving average, each located at a distance that is twice the standard deviation over periods X, on which the moving average was calculated. These bands should not be confused with support or resistance levels, nevertheless asset prices do tend to stay within their bounds.

Essentially, the Bollinger Bands 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 Bollinger Bands generate a trading channel within which the price of a security resides for almost 95% of the time during any specified time period.

The standard setting for the period T of the Bollinger Bands is 20 periods. Traders according to the past behavior of each financial each asset they may adapt the Bollinger Bands period settings to less or to more than 20 periods.

The interpretation of Bollinger Bands is largely dependent on the development of the title. If the track follows a trend, the lower strip and the upper strip diverge. The greater the difference, the greater the tendency is strong. Conversely, if the bands are close this means that the title does not indicate any trend marked the court and varies little stagnant.

Bollinger Bands explained: What are Bollinger Bands in Binary Options

BOLLINGER BANDS STRATEGY FOR BINARY OPTIONS

Traders usually use Bollinger bands with other technical indicators for confirmation. For example, Bollinger Bands will be compared to a non-oscillator indicator like charts or trend lines. The information from these tools can reinforce expected price behavior, and the trader will have greater confidence in the Bollinger bands pattern that he is witnessing.

On a graph that shows the Bollinger Bands, when the price drops below this band, it is advisable for the trader to fix a call or above option in anticipation of a market rise above a specific level. On the contrary, when the price goes above a Bollinger band, it is generally  advisable to place a below or put option.

Example:

If you take a foreign currency pair like the USD/JPY when this rate comes into contact with a lower band, there may be a market sentiment for a return toward the upper band. This may be the time to buy a CALL. On the other hand, when the USD/JPY binary options asset price reaches the upper band, at that moment consider buying a PUT.

Bollinger Bands Strategy example

In this chart, we see that a resistance line can be drawn at the level of the upper Bollinger band to connect the price highs. A lower trend line can also be drawn across the price lows as support. A break of this support will form the basis for a PUT trade using the break out principles where price is allowed to pullback to the broken trend line for precise entry.

So, as you have probably understood, to succeed one must determine the best time to place binary options. You have to develop a feel for the momentum if the price is reverting around its’ moving average or if the option is moving in a new channel up or down.

What is good about this strategy? Any trade taken in the direction of the overall trend has a higher probability of being successful. The strategy makes you trade only in the direction of the main trend and if the trader manages to keep disciplined and follow the simple rules, this one can be a money maker.

Please note that Bollinger Bands should be used with other forms of analysis, including sentiment, fundamental, and of course, technical. You can use an oscillator, like a Stochastic, to confirm your entries.

 

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