Bollinger Bands are an indicator which help to reveal trends, reversals, and price volatility (or lack thereof). As such, this indicator can be extremely beneficial to those who trade binary options. Within technical charts, these bands consist of three parts – a moving average, and upper/lower price lines. The combination of the three work to correctly identify the current price action, as well as to provide an excellent forecast in relation to where the price may go next.
The upper and lower bands should the boundary of price range for a period of times. These bands will remain positioned on either side of the asset price. What they help to show is the difference between the upper and lower levels in relation to the moving average. The bands are a statistical curve, which is sometimes referred to as a bell curve, and do reveal support and resistance levels.
The 20,2 setting is most commonly used. When applied within a chart, this presents the moving average inside of the center of the bands, with the period average being 20. The two bands will function as standard diversions, completely separate from the moving average. The price of the asset being analyzed should remain between the two over 95% of the time. The only exceptions to this will come when market sentiment is extremely strong.
This indicator can be used along with any underlying asset, and work well with various time-frames. These bands will clearly show you when the asset price is close to either support or resistance levels. When the asset price is near either band, the odds are great that the price action will pause and then reverse, moving opposite the band. Clearly, this indicator is one of the best tools for use in spotting upcoming reversals.
The strategy itself is quite simple. The first step will be to determine whether the bands are spaced close together or far apart. When the gap is narrow, the Bollinger Bands are telling you that traders are feeling indifferent and the upcoming movement will be tougher to predict. A wider gap between the two will indicate less indecision among investors, and will be a more favorable setup for taking trades as the price movement will be much clearer.
The next step will be to establish how the bands are moving. Are they moving side-to-side, up, or down? Horizontal or flat movement is simply viewed as a resting point, after which the asset price will begin to rise or fall. Upward band movement will signify an ascending price trend, presenting the opportunity to take a Call trade. The opposite applies with downward movement, revealing a downward trend and opportunity to take a Put trade.
The asset price itself should be located to the far-right of each band. Whether viewing the chart in candlestick or bar format, when these are located on either band, be prepared to wait for the entry signals. This type of positioning shows flat movement, which could continue for a period of time. The wait for a change in sentiment that will send the price back into motion can be significant, so patience will sometimes be required when using this binary options strategy.
The method outlined above will not be 100% effective, but it can certainly help with decision making. Bollinger Bands have been used for many years, by all types of traders, to help with price forecasting. This indicator can be used along with other technical indicators, so do not hesitate to select another tool to use so as to receive further validation that the signal provided by the bands is indeed the correct one.