Bollinger Bands binary options’ indicator is some sort of collection of the moving averages, but it is based on the market’s volatility concept. In other words, these bands can change not only because of the price’s direction, but also because of the nature of the market’s movement. They help a trader to determine, how long would the certain movement in the market last before the termination of this movement. At the same time, the standard deviation is used as the tool to estimate the volatility.
Formation of Bollinger Bands indicator
On a chart the Bollinger Bands are formed as three moving averages with different periods. Distance from the outermost bands to the central one is formed by the price’s behavior. The range between outermost bands is called the standard deviation, and it is determined by the price’s deviation from the certain level of the moving average for the period of time which lies at the heart of a research.
Extension of the price range and the range between outermost Bollinger Bands occurs at the time when the market’s volatility grows. Conversely, a narrowing occurs at the time when volatility in the market decreases. When the range extends, the directional movement of a price appears. In other words, the trend’s formation starts. The middle Bollinger Band is needed to determine the direction of the movement in the market. In other words, you can determine which trend (ascending or descending) is forming in the market currently by assessing the price’s position in relation to the middle band.
It is necessary to note that Bollinger Bands itself is the unique auxiliary tool for a trader. Majority of other indicators allow either determining trend or determining volatility. But they can’t do both these actions at the same time.
John Bollinger, who is a creator of this binary options’ indicator, has accentuated its certain specifications which allow a trader understand what’s happening in the market better and conduct more profitable trading. For example, if a price chart is moving from the outer side of one of the outermost bands, we can say that the current trend will continue. If a price rebounds from one of the range’s bounds, it moves to another bound. The volatility’s decrease and the subsequent narrowing of the band’s range lead to the situation when a quick momentum in the future is possible. One of the researches in the binary options’ Bollinger Band has shown that the range can be exceeded by not more than four candles or bars.
Usage of Bollinger Bands indicator
In order to be successful when using the Bollinger Bands binary options’ indicator, the following trade recommendations have to be followed:
1. If a price on a chart crosses the middle band from down to up, a clear signal to buy the Call binary option appears. If a price crosses the middle line from up to down, a signal to buy the Put binary option appears. If a price is located near the top range’s bound, the Put option can be bought. In this case, the top band acts as the resistance line. In such a case, a trader expects that a price will bounce from the resistance line in the direction of the support line. When a price is located near the bottom range’s bound, you can buy the Call options. In such case, the bottom bound is the support level and a trader assumes that it will bounce from the support line in the direction of the resistance.
2. But a price doesn’t always move between support and resistance levels. There are situations when traders start to trade in order to break them out. In this case, if a price moves closer to the top bound of a range, it is needed to buy the Call option, expecting that the resistance level will be broken, and a price will move higher. The opposite has to be done if a trader is willing to trade in order to break out the support level. When a price moves closer to the bottom range’s bound, a trader has to buy the Put option, expecting the break out of a bound and further price’s movement down.
There are many variants how to use the Bollinger Bands binary options’ indicator. Every trader decides for himself, which exact variant to choose.