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One of the most popular trend indicators, the Bollinger Bands, was developed by John Bollinger. To date, many traders use this indicator to follow a trend.
However, this is not the only way to work with Bollinger Bands. And in connection with trading Binary Options, we must always keep an eye on the current time frame so that we can adjust the expiration time. In this article, you will learn how to use the Bollinger Bands indicator by trading Binary Options:
- Trend Trading with Bollinger Bands
- How does the Bollinger Bands Indicator work
- Find volatility with Bollinger Bands
- How to trade with the Bollinger Bands
Tracking trends with the Bollinger Bands indicator
Before we get started, we need to be clear on one thing that is different from Forex trading, namely trading Binary Options. Binary Options trading is a very different way of approaching the market
This also limits the tools that can be used. That is why it is all the more important to always work with absolute discipline and to stick to the trading plan. A trend differs in length and structure. Therefore, when trading with trend indicators such as the Bollinger Bands, we should use only a few setups. Or, as was the case with moving averages, only take the first two trades that are available.
Calculation of the Bollinger Bands explained:
The indicator has three lines: the UBB (Upper Bollinger Band), the LBB (Lower Bollinger Band) and the MBB (Middle Bollinger Band).
All three are of equal importance. In addition, it is very important to know that the price movement is located most of the time between the two outer bands. The MBB is a moving average. Ideally an EMA (Exponential Moving Average). Why is this so?
If you compare the EMA with an SMA (Simple Moving Average), you will see that the EMA reduces the gap between price and average. Thus, as a trader, you get the entries displayed earlier. In a bullish market, the Bollinger Bands have the advantage of making it visible. It is almost impossible to miss a new trend if you pay attention to the details. In the video dedicated to this section, we show the steps necessary to trade binary options with the Bollinger Bands.
As it is a trend indicator, it is also included in every Binary Options platform that offers professional charts or “advanced charts”.
Unlike trend indicators, which are integrated directly into the chart window, oscillators are displayed in a separate window below the price chart. As traders, we should define what constitutes a bullish and a bearish trend. We always keep this in mind when we use the UBB and MBB for a bullish setup – and the LBB and MBB for a bearish setup.
In the first case, of course, we want to buy call options, while in the bearish scenario we look around for put options. And again – the expiration date depends on the time frame.
Since every trading platform with professional charts offers the Bollinger Bands, you will have no problem finding them and implementing them in the chart. After that, it is important to find the first price breakthrough either above the UBB or below the LBB.
This is the signal for us that a new trend is forming. And then we look for the first pullbacks into MBB.
Trade call options in an uptrend and put options in a downtrend. But make sure that you give the options enough time to expire.
Still, a disciplined approach requires you to stick to making two trades – and ONLY two trades. Never mind that in our example the trend was so strong that there would have been many opportunities to buy call options.
Our intention is to use a setup that works as often as possible – and not just sometimes!
That’s why you never forget the potential that arises from this simple approach, considering the variety of time frames and financial products.
Of course, not all options expire in money. There is no setup that delivers a 100% success rate. But it’s important that you end up with more winners than losers. And that’s why it’s also important to always stay disciplined and focus on the options.
Is this the only way to use the Bollinger Bands? No, it is only the most common one.
These bands also measure volatility. And that’s what you need when the market rises or falls rapidly before a major economic news event. The next picture shows how to use the Bollinger Bands to measure the volatility of a financial product and how to trade binary options while following a logical process.
In this second picture, dedicated to the Bollinger Bands, we start with another example. This time we use the AUD/USD currency pair. We simply use the same concept as described in the first part to demonstrate the power generated by only two signals of the Bollinger Bands.
We use this example with the AUD/USD to show how powerful the Bollinger Bands are when used as a trend indicator. Think back to the previous EUR/USD pair and now look at the AUD/USD pair. Now you will understand why the first two signals are already enough to trigger a Striking Price (the execution price at which we buy or sell).
The Bollinger Bands are an excellent tool for making volatility visible. This is especially the case when important economic news is about to be released.
Use a broker which provides the Bollinger Band indicator on its platform:
The Bollinger Bands as Volatility Indicator
Volatility is more important in the Forex market than in Binary Options because there is a cost to keeping a position open in the Forex market overnight or longer (most currency pairs put a strain on the trading account – this has something to do with the interest rates of the different currencies), so traders try to avoid open positions during consolidation.
This is not the same with Binary Options. Once the option is in the money, no one cares if it’s a move or a consolidation. But what if there is a way to predict when the price will break out?
If the Bollinger Bands show you that they are going apart each other, you will see that the volatility will increase:
Trading with the Bollinger Bands
Sometimes the Bollinger indicator is also called “breakout indicator”. Have you ever wondered why that is?
UBB and LBB were actually designed to measure the volatility of financial products. Be it on the capital market, be it a currency pair or an index – the two bands tell us when a break is imminent. Thus, traders of Binary Options can also prepare themselves. But – most importantly – traders must have a plan for trading breakouts with the Bollinger bands.
For example, let’s look at the NFPs (Non-Farm Payrolls) this week. Typically, the price doesn’t move significantly in one direction until the announcement on Friday. Binary Options are now traded in an NFP week in such a way that you either wait until the Friday announcement is over or set the expiration date to be after that announcement.
A currency pair, for example, will consolidate permanently – I’m talking about an important currency pair, one that includes the USD.
So in preparation for the break, we implement the Bollinger Bands in our chart. Next, we’ll just look at the distance between UBB and LBB, where it shrinks. This is a sign that volatility is subdued and a jump is imminent.
To trade an option at this point would be nothing more than pure gambling. We should avoid that. The right thing to do would be to wait until the news is released. If that happens, the price will move above or below one of the two Bollinger bands.
But do nothing yet! Wait for the candle to close.
The idea is to buy put options at a closing price that is below one of the two bands – either UBB or LBB. Either way, we have to wait until the candle is closed before we do anything.
However, if the market breaks out after an important news item, it may well give the wrong signal. If the price goes down or plunges as expected, but then immediately goes back in the opposite direction before the candle is closed.
That is why it is so important that we wait until the closing price is fixed.
Conclusion of trading Binary Options with Bollinger Bands:
In summary, the Bollinger Bands indicator provides a good opportunity to enter the market in a disciplined manner. As traders, we want to be on the right side of the market as often as possible.
Since trading is a game of opportunities and the market is constantly changing, it is not easy to be right. That is why you always have to be disciplined.
Only disciplined behavior leads to profits. Both of the opportunities shown here to trade with Bollinger Bands offer results for near-perfect shrinking prices. The key is to integrate the signals into the right money management system – then you are always prepared accordingly.
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