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Bollinger Bands for Binary Options

Tuesday, November 29, 2020

Binary Options are one of the fastest growing investment vehicle in the marketplace. Binary options can appeal to both the novice trader who wants to enter the markets on a less complex level or for experienced traders who are currently trading spot FX and CFDs. Traders find that binary options are a great place to try out new strategies or to test their knowledge in a lower risk type trade while beginners might find the intuitive nature of binary options more attractive.
Binary Options is all about predicting the direction that an asset will move over a short period of time. There are many ways to apply technical analysis to help trade successfully.

Bollinger bands are one of the most popular indicators used in the forex and commodity markets. First developed by John Bollinger in the 1980’s the bands gave strong signs of market momentum and entry and exit points. Bollinger Bands now also work great for binary options using a new strategy and application; a trader can safely find entry points when market momentum will carry an asset in the same direction over a short period of time, giving a binary option trader a window to trade successfully.

Barry Norman
Barry Norman is the Director of Investors Trading Academy as well as a published author and educator. Barry brings with him over 35 years of financial market knowledge and experience. He holds an MBA in Finance and Economics from UCLA and an undergraduate degree in Economics from the University of Maryland. Barry was award the title of “Best Education in Europe” by Global Banking & Finance. Barry is also a presenter for the MoneyShow and many well-known news sources.

Bollinger Bands & RSI

Characteristics of the strategy

  • Type: scalping;
  • Charts period: 30 second – 60 seconds;
  • Currency pairs: any with high intraday volatility;
  • Trading period: the whole trading day Forex

Video

How to trade

Adjust indicators in your trading system:

Signal conditions:

  • CALL – when you see price goes up from lower BB line and RSI also goes up from level 20
  • PUT – when you see price goes down from higher BB line and RSI also goes down from level 80

The vfxalert signal of an Adaptive (M1 or M5) algorithm should be the same direction as a signal of the current strategy.

Expiration time:

How to open the position:

Some bits of advice:

  • The strategy works very well when the trend of M15 or M30 is Flat.
  • For turbo-options, it is highly not recommended to use Martingale or doubling the next transaction to compensate for the losses of the previous one. At small timeframes, mostly “market noise” is traded, trends last no more than 3-5 candles and it is better to wait for a strong signal on the strategy. You can vary the amount of the option depending on the strength of the vfxAlert signal, as shown in the video;
  • The impact on the market of significant fundamental news and statistics can’t be predicted from technical strategies and it is better to refrain from trading during these periods, especially for beginners. Experienced traders can use strong signals from indicators and vfxAlert before the news release as leading, but you can not rely entirely on them.

Relative Strength Index:

The indicator RSI is an oscillator, and therefore it oscillates in a certain zone, limited by the maximum and minimum values. The index of Relative Strength is set on a scale from 0 to 100. It works best, reaching areas of extremes. The criterion for evaluation is two lines drawn at the level of 30 and 70. It is believed that overbought zone is above 70, and below 30 is oversold. Therefore, when the value of the Relative Strength Index reaches and rises above 70, there is a threat of a drop in prices; movement below 30 is perceived as a warning of a near rise. Some analysts advise accepting 30 and 70 levels as boundaries only with side trends, and 20 and 80 with clearly expressed bullish and bearish.

Of course, exceeding levels 30 and 70 does not mean that you need to immediately begin making deals. After all, the market may be in a state of overbought and oversold for a long time, and the oscillator, warning about a change in the trend in advance, does not explain when exactly this can happen.

How to choose the optimal period? The fact is that for different timeframes of the same currency pair, it will be different, so it will not be possible to use once successfully selected indicator period on all time scales of the pair you need. As a rule, the smaller the timeframe, the longer the period should be and vice versa. It is not difficult to find the optimal period for the RSI indicator – you need to consistently look through the periods and look at the overbought and oversold zones. As soon as the main highlights (reversal, key) highs and lows on the price chart begin to be reflected by the indicator in the overbought and oversold zones, and the rest will be (at least most of them) outside these zones, consider that the optimal period is found.

Many traders do not like classical indicators and even indicators in principle. I believe that they simply do not know how to cook them.

Bollinger Bands

One common feature is similar for any chart and any asset class in the financial markets – prices always move like waves. Binary options type of trading is keen on taking advantage of that attribute of quotes behaviour. Any strong trend comes together with healthy retracements from time to time with rates of underlying assets coming back to average values, while bullish or bearish accelerations are accompanied by higher volatility. Bollinger Bands binary options Strategy became popular thanks to the simple view and clear indication of those three basic factors for the price action – average value, volatility and fluctuations range.

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What Is a Bollinger Band?

What do Bollinger bands show?

  • The middle line points to the average value of the underlying asset. This is a standard exponential moving average with the chosen period;
  • The upper line shows the current resistance. This is a dynamic curve, the value of which depends on recent price action and volatility. When quotes are placed between the middle and upper line, the binary options market is in the uptrend;
  • The lower line indicates the support level. It also changes the value if prices move fast. Downtrend conditions occur when rates are between the middle and lower lines.

The screenshot below shows the structure of Bollinger Bands explained:

Bollinger Bands settings

The indicator has two main parameters influencing the overall view:

  • The first one is the period or length, which affects the middle moving average. The larger period is set, the wider Bollinger Bands’ range is shown. The default period is 20 bars. Choosing the right period depends on individual binary options strategy, the preferred expiration time for binary options and the selection of an underlying asset. The most common Bollinger Bands Binary Options strategy suggests using period like 21 or 34 bars.
  • The second parameter is a deviation . Usually, binary options choose deviation 2, while a smaller value would squeeze the indicator’s vertical range, and a higher value spreads the amplitude. There is also a Double Bollinger Binary Options trading strategy, implementing two indicators with different deviations.

Here is where settings can be changed:

How to read Bollinger Bands?

Reading Bollinger Bands stock charts is simple as the indicator reflects the price action and change in the momentum.

There is a general set of rules describing several events in the binary options market:

  • During a strong uptrend or downtrend, Bollinger Bands lines spread the overall range between them, and head in different directions. That is a strong signal about larger volatility, and chances for a bullish or bearish acceleration grow, depending on the trend direction.
  • If Bollinger Bands lines narrow the overall range after a strong trend, then a retracement or correction is likely, and the price might bounce back to the average value, as the volatility drops.When a price crosses the middle line, that usually points to a change of the current sentiment.
  • If the crossover was charted from below to above, then the bearish bias would change to the bullish one.
  • If a daily (weekly, hourly) close price (not a shadow of the candlestick) appeared above the upper line or below the lower line, then a bullish or bearish breakthrough might happen, predicting higher or lower prices to be charted in the nearest future.
  • If a test of the resistance/support happened, and an asset charted a whipsaw above/below the line but failed to breach it with the close price, then a rebound to the middle line is likely.

Here is an example of bollinger bands stock chart in action:

How to use Bollinger Bands?

Like any other system based on the technical analysis, Bollinger Bands aims to find reversal conditions, calculate the average value, as well as determine resistance and support levels. Given the mathematical formula based on calculating channels, the indicator has the most effective performance during sideways consolidation ranges as it clearly shows the market’s intentions from the previous action. At the same time, the start of a strong trend is also visible when Bollinger Bands lines spread the overall range, pointing to larger volatility. Thus, binary options traders can take advantage of the Bollinger Bands indicator to maximise the profit when prices chart a one-way performance.

Therefore, before trading with Bollinger indicator, traders should make several preliminary conclusions:

  1. Find out whether the underlying asset is in an uptrend, downtrend or consolidation on larger timeframes than the chosen expiration time;
  2. Determine whether a reversal or by-trend trading strategy is preferable;
  3. Decide whether to buy call/put options is more attractive or the two-way strategy is desirable.

After, that traders can use the rules described above. For example, buy call options after the price crosses the middle line, targeting the upper band as the level when to stop the trading cycle. Or enter against the bullish trend, buying put options when rates failed to break through the upper line.

If you like this strategy, you might also be interested in this Trend line Trading Strategy

Examples of profitable trades

Intraday two-way trading on currency cross-rates in both directions

The screenshot below shows how effective the binary options strategy is when the underlying asset is in a sideways range, even though with a slightly bullish bias. Several entries were used on reversal signals, while the number of profitable deals clearly overweights corrective candlesticks during all of the three intraday trading cycles shown on the chart.

Combination with Bollinger Bands and ADX Indicator

Several additional technical tools might be added to the technical analysis in order to compensate Bollinger Bands weak points and filter false signals. One of the most effective tools for such a combination is the ADX indicator, which shows the markets momentum. If the ADX mainline edges higher, and the ADX surplus is negative (red), while prices reach the bottom range of the Bollinger Bands, then the likelihood of bearish continuation is high. However, if the rate failed to chart a bearish breakout, then it’s worth waiting for a retracement to the middle line before continuing buying call options. Here is the GBP/USD daily chart setup to use Bollinger Bands together with ADX indicator.

Pros and Cons

Despite the indicator’s informative view compared to standard moving average, and effective trading signals with simple rules and clear conditions, the Bollinger Bands binary options strategy, like any other lagging indicator might show false signals, especially when the binary options market is affected by large volatility and sharp price swings. That is mostly related to breakthrough signals, which do not guarantee further movements in the same direction.

  • Simple view;
  • Informative data representation;
  • Flexibility of settings;
  • Effective signals;
  • Indication of volatility.

Cons:

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