As a beginner in the Binary Options market, you may find it difficult to use technical analysis in making decisions on when to enter the market. However, there are some simple indicators available to you that don’t require much knowledge. It is sufficient to keep focused and pay attention to a few details and after a little practice you will start to notice them automatically. In this article we will see how to use the Bollinger Bands indicator in order to create a profitable strategy that will fit your Binary Options needs.
Bollinger Bands can be used as a stand-alone strategy, or you can use them as a support tool for other strategies. As we are beginners we’ll be looking at the first option today. First you need to find this indicator on your chart. Look for Bollinger Bands in the trend indicators menu.
Before getting to the strategy itself, let‘s first understand what the Bollinger Bands indicator is all about and what it shows. Bollinger Bands is one of the most popular indicators for trading in binary options. Bollinger lines consist of three lines that show an upper and a lower limit and the central line which shows the moving average (MA) of the price. The beauty of the bands are their simplicity, because it’s a smooth line it cuts out all the noise in the chart and focuses purely on the moving average and upper and lower limits. They are especially good at identifying volatility changes and market cycles eg. When the price is about to rebound or change direction. When the lines show a break out or a rebound further form the moving average line, it can provide some great signals
Bollinger Bands themselves are built at a certain distance from the central MA. The distance is not constant but variable, meaning the bands are constantly getting narrower or moving further away from the MA line. Because this value varies along with the price, the width of the bands will be always different.
How does the Bollinger Band indicator look like?
On the chart, Bollinger Bands looks like three lines. Two of them, the upper (Bollinger band Up, BBU) and lower (Bollinger band Low, BBL), are located above and below the price chart at a certain distance. The middle line between the two boundary lines is a simple moving average.
How do the Bollinger Bands behave?
In unstable markets with high volatility, the bands are expanding. And respectively, when the market is calm, the bands get narrow.
This image can tell us that even without seeing the chart and price values, we can determine the emotional state of the market.
How should I read the Bollinger Bands indicator?
- The compression of the price range eg. The bands narrowing is usually followed by a volatile jump in prices.
- The break of one of the bands indicates the continuation of the current trend.
- If the next high or low is formed outside the band, it means that the current trend continues.
- The nature of price movements within the bands is usually wavy. When the price after the breakdown returns within the bands, it often reaches the midline (MA), and then again tests the broken line, and only after that breaks midline the second time and goes to the opposite limit of the range. For example, the price tests the upper limit twice and then goes to the lower limit via Moving Average line.
Now let us describe the strategy. As mentioned above, Bollinger Bands is about 3 bands, one of which runs centrally and the two others are on the borders (top and bottom). You should be interested in the bands that are found at the edges. This particular strategy works best when there is no clearly defined market trend, when the asset price moves sideways. When the price comes closer to one of the bands, it indicates an impending price reversal.
With this Bollinger Bands strategy we do not pay attention to patterns (such as pin-bar or doji) or sizes of candles, we only closely follow the price.
First of all set the Bollinger Bands indicator. Leave the default settings on the chart: deviations – 2; period – 20.
When the price gets very close or touches one of the bands, you need to buy an option by setting the Expiry Time equal to the closing time of the next candle. At this point you should have read and understood the principles of candlestick charts. These are key for traders to know. If you don’t know how candlestick charts work, its time to read up on that and then come back here again!
If the asset price moves towards the upper limit, you should buy a Put option.
If the price gets closer to the bottom limit, buy the Call option. Entry points are indicated in the chart below.
To obtain more accurate signals, it is not necessary to exclusively use the Bollinger Bands indicator. For more accurate and profitable entry points, use additional data, such as support and resistance levels, reversal candle patterns as well as the Stochastic indicator. We recommend you to take into account all of the incoming news. In this way, you will be able to make more accurate predictions and make better profits with this simple and efficient strategy.
This strategy is perfect for those who like short term trading as it provides lots of signals, so, test it on your demo account and then generate profits!