Binary Options Strategy: Trading using the Bollinger Bands

The Bollinger Bands is a very popular technical analysis tool to trade binary options. A trading strategy that is based on the Bollinger Bands is suitable for trading High / Low Options.

What are the Bollinger Bands?

Bollinger Bands is a tool created by John Bollinger during the ‘80s. Bollinger Bands and their related indicators can be used to measure the current market conditions compared to previous market conditions. They can measure in other words the ‘Highness’ or the ‘Lowness’ of an asset price relative to previous closings. Using the Bollinger bands, binary options traders are able to identify assets that have already reached their short-term price limits and that are expected to move in the opposite direction in order to correct and to absorb the broader current price levels.

Bollinger Bands Formulation

Three (3) curves are included in the Bollinger Bands model.

◘ The Middle Band calculates a moving average of an asset during a period T.

◘ The Upper Band and the Lower Band which are found on a specific distance upper and lower of the Middle Band. That distance is equal twice (x2) the standard deviation price for the period T.

Standard Settings of Bollinger Bands Tool

The standard setting for the period T of the Bollinger Bands is 20 periods. Traders according to the past behavior of each financial asset they may adopt the Bollinger Bands period settings to less or more than 20 periods.

Chart: Bollinger Bands on EURUSD

The above chart consists of EURUSD (1-minute chart). The Bollinger Bands are set to 20 periods. In general, EURUSD as any other asset when reaches the upper band has the tendency to correct in lower levels. In the other hand, when EURUSD reaches the upper band has the tendency to correct and to move in higher levels.

Trading Binary Options using the Bollinger Bands

When trading binary options and an asset reaches the lower Bollinger band, you can buy a Call Option and when the asset reaches the upper band you may buy a Put Option. It is important that you have study first the past behavior of an underlying asset before jump into any conclusions about the effectiveness of the Bollinger bands.

Another important issue when trading using the Bollinger Bands is to understand the momentum of the price of an asset and adjust the periods (T) according to that asset past price behavior. Crucial Support and Resistance price levels should always be taken into high consideration. If the asset price is about to reach an important resistance or support price level, it is far better to wait and see what happens and then execute your trade.

□ Trading using the Bollinger Bands

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