Binary Options Bollinger Bands trading strategy.
Whether you want to make a short-term or long-term trade, it’s essential to arm yourself with the right trading strategy for increasing trade profitability. Having a detailed trading strategy decreases the risk of losing money and increases confidence.
But which trading strategy should you choose? Well, you can consider using the Bollinger Bands trading strategy because it’s easy to use. The simplicity of this strategy makes it manageable for traders to get a better understanding of the market.
Below are some of the details of this strategy that will help you understand how to calculate Bollinger Bands, how you can trade with this strategy, and what its limitations are.
What you will read in this Post.
What is the Bollinger Bands trading strategy?
Bollinger Bands is an essential trading tool that makes binary options trading simple, effective, and quick. With the help of this simple-to-understand tool, you can easily predict the market in a few seconds.
John Bollinger created this trading strategy. Bollinger Bands works by forming a channel around price movement. Here, the channel is based on moving price average and standard deviation.
This trading indicator is generally used for short-term trading. That’s because Bollinger Bands indicates low market volatility. Also, it gives a signal when the market starts moving.
The work of Bollinger Bands indicator is to predict the price of the market on the basis of past market data. Bollinger Bands represents data by drawing three lines after analyzing, aggregating, and calculating the past records. These three lines are known as bands.
(Risk warning: You capital can be at risk)
An upper line.
The upper line in the trading chart is the upper end of the predicted range. It is a result of the standard deviation plus moving average. The sum is then multiplied by a factor. Here, the upper line works as a strong resistance.
A lower line.
The lower line in the chart results from standard deviation minus moving average and multiplied by a factor.
In the chart, the lower line represents the lower end of the predicted range. Also, it works as strong support.
A middle line.
Lastly, you will see a middle line, which is mainline. The middle line in the chart is the moving average, and it acts as an additional barrier.
This line works as support when the market is trading below. Also, it acts as a resistance when the market is trading above.
The Bollinger lines predict three things.
It shows whether the trading market will stay inside the outer lines or not. Next, it shows that when the market reaches the middle line, it will slow down. But sooner, the line will breakthrough. Lastly, the lines indicate that when the market moves between two lines, the movement will continue until it reaches another line.
In simple terms, the work of Bollinger Bands is to help the traders understand when the right time is to enter and exit the market. It is done by analyzing the asset- whether it’s oversold or overbought.
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What do the Bollinger Bands tell you?
Bollinger Bands is one of the few popular trading techniques that both new and experienced traders can use. This technical analysis tool is still standing strong because it’s not complicated like other trading indicators.
If the price of an asset in the market is moving close to the lower band, it means oversold. Similarly, if the price is near the upper band, it indicates overbought. Additionally, when the market is less volatile, the band contracts. And when the market is more volatile, it widens.
Squeeze.
Bollinger Bands squeeze.
Squeeze is one of the concepts of Bollinger Bands. Squeezing happens when bands come closer. When you notice a squeeze in the market, you can conclude that market volatility is less.
Many traders like this situation because they believe squeeze indicates future trading opportunities and increases market volatility. Moreover, if the band moves apart, it decreases volatility and offers excellent trading possibilities.
One thing you must remember is that the bands do not give any kind of trading signal. That means it’s difficult to understand when the change will take place.
Breakouts.
Bollinger Bands breakout.
The price movement of an asset takes place between two bands. That’s why when there is a breakout, it is observed as a major event.
Although breakout in Bollinger Bands is seen as a significant event, it’s not a trading signal. So, when there is a breakout, you should not rush to buy or sell assets,
(Risk warning: You capital can be at risk)
How to calculate Bollinger Bands?
For calculating Bollinger Bands, you need to figure out the moving average of 20 days. The closing prices for the first 20 days are the first data point. Additionally, the next data point will be the earliest price drop, i.e., the price of day 21 and the following days.
Here’s a simple formula for calculating Bollinger Bands.
BOLU is upper Bollinger Band.
BOLD is lower Bollinger Band.
MA is moving average.
TP is typical price, i.e., (high + low + close) divided by 3.
n is the number of days in the smoothening period.
m is standard deviations.
σ[TP,n] is standard deviations of the last n period of TP.
Using this formula, you can easily calculate Bollinger Bands and use it for binary options trading.
How do Bollinger Bands work?
Here’s a quick example to understand how Bollinger Bands work.
Let’s assume that the price of fruit is $10. After a while, its price suddenly increased to $11. When the price suddenly increased, only a few people purchased it. That’s why the price of a particular fruit came back to $10.
Similarly, if the price of that fruit suddenly drops to $9, its demand will increase. The surge in demand for the fruit will again bring its price back to $10.
Through these examples, you can conclude that a sudden change in the price of an asset is temporary. That’s why there is always a slow change in the price over time.
What Bollinger Bands does is that it reflects this assumption. This trading indicator adapts dynamically to the price change in the market. The price change of assets also changes its volatility.
Here, the middle line, i.e., moving average, indicates long-term price change . On the other hand, lower and upper lines create a space where price fluctuates.
So, when the price moves towards the upper band, you can understand that the asset is getting expensive. And if it moves towards the lower band, it becomes cheap.
In short, Bollinger Bands helps in understanding market psychology. When you have a better market understanding, you make better investments.