Bollinger bands in binary options trading
Bollinger Bands® are volatility indicators represented by a simple moving average alongside a + and – deviation called the upper and lower bands. A detailed explanation of the Bollinger Band indicator can be found here.
Bollinger Bands indicator makes for a great indicator as part of a trading system when it comes to forex. However, with binary options trading, traders will have to pay more attention to price action and Bollinger Bands. Unlike forex, where its easier to enter a trade with a fixed target price, with Binary options, traders need to consider an additional parameter, which is the contract expiry time.
So for example, if there was a reversal at the upper bollinger band on the 15m chart, while it hints to a CALL option, the trader would have to choose their expiry times a bit more wisely. There are many ways to trade Binary options with Bollinger Bands®.
Bollinger Bands – Multi Time Frame Analysis
In order to overcome the issue of the expiry times, a good way to trade binary options using the Bollinger Bands strategy is to do a multi-time frame analysis, from the top down. Meaning, starting with the daily charts and going all the way through to the 15 minute chart.
To put it simply, if the daily candle for the previous day hints to a bearish engulfing that formed right near the upper Bollinger Band, then the trader could move to lower time frames in order to enter a PUT option when there is a similar formation on the 15 minute or 1 hour time frame. Based on the volatility factor (the expansion and contraction of bands), traders would be able to further guage how quickly price is likely to move lower thus giving a better chance at choosing the right expiry times.
Bollinger Bands – Breakout Strategy
Under the breakout strategy for Bollinger Bands, traders can take on a CALL option when a candle closes above the upper Bollinger Bands. This again depends on various factors such as the trend as well as how the Upper and Lower Bollinger Bands are positioned.
It is generally assumed that when price tends pierce one of the bands during periods of volatility, that price action is likely to continue all the way. However, the risk to such kind of trading is that there is no guarantee that price is going to push higher. The likelihood of a correction (with price returning to the 20 SMA/mid band) cannot be ruled out.
Bollinger Bands – Ranging Markets
When the Upper and Lower Bands are almost horizontal and tight, price action respects these bands and tends to bounce off the outer bands. Trading in such market conditions offers a higher reliability of trading signals thus allowing traders to place an appropriate CALL or PUT option.
Additional Indicators for Confirmation
As with any indicator, it is always advisable to take on a trade only when there is confluence between 2 or 3 different indicators. For Bollinger Bands, RSI (14) is a widely used oscillator. Along with RSI, traders can also benefit from identifying potential reversal candlestick patterns such as Bullish/Bearish Engulfing, Dark Cloud Cover/Piercing Line candlestick patterns near the upper or lower Bollinger Bands.