When it comes to technical analysis, many traders use Bollinger Bands to determine the volatility of the market in relation to a particular asset. When you know whether the volatility of the market is high or low, you are better placed to profitably leverage movements in asset prices.
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.
How to Trade Binary Options with Bollinger Bands Strategy?
A look at any technical trading price chart indicates two bands and a middle moving average. At the heart of the Bollinger Band chart is the moving average, which represents the intermediate price trend of an asset within a specific expiry period. This is the middle band as viewed on the price chart and is assigned to 20 periods by default.
Meanwhile, the other two bands—the upper and the lower are an indication of high or low market volatility respectively.
These two bands are mapped two deviation points away from moving average. High volatility in the market is imminent when the bands move further away from the moving average or the middle band indicator. Conversely, when the markets experience low volatility there is a smaller deviation from the moving average.
Although Bollinger Bands can be helpful in making trading decisions such as when to go long or short on an asset, they are not a good indicator of price movements. The bands will also not show you when a price reversal is bound to happen.
A major mistake new binary options traders make when using Bollinger Bands is that they make a call option or put option decision solely based on the compressions of the bands. Whether or not the moving average touches the lower or upper band is not an indication of a call or put signals. This is why it is important to use the Bollinger Bands strategy with other technical indicators to predict the price movement of an asset.