The Bollinger band can be a guide in trading binary options. The bands may assist in determining the High/Low of an asset or also known as Above/Below. This method can be used in the same manner with Touch options. Bollinger bands can be effective in formulating buy and sell signals.
The technical analysis tool of Bollinger bands consist of a three curve channel. The middle curve calculates the rolling average of the asset’s price in the most expedient way. The top curve presents the standard deviation above the rolling average, and the bottom curve similarly presents deviation below the mean average. Thus with Bollinger bands, you can more easily view if the price of a binary options asset has surpassed the moving average limits. If there is a tendency to revert to the average-mean average-, the binary price will start to revert to the center, i.e. the moving average.
As a tool, Bollinger bands use varies. Some traders buy when price touches the lower band and exit when price touches the moving average in the center. Others buy when price moves above the upper band or sells when price falls below the lower band. Other traders who watch for volatility sell options when the bands are historically spread wide apart or buy options when the bands are historically close tightly together. In these types of trades, the trader is anticipating volatility to move back towards the average historical volatility. Sometimes, the bands can form a slope with a random walk oscillating up and down between the bands as if in a channel.
Traders usually use Bollinger bands with other technical indicators for confirmation. For example, Bollinger Bands will be compared to a non-oscillator indicator like charts or trend lines. The information from these tools can reinforce expected price behavior, and the trader will have greater confidence in the Bollinger bands pattern that he is witnessing.
Before using the bands, the trader should analyze and customize them for binary option trading. Some binaries have very short life spans, yet while using the moving average and standard deviations, the longer the time frame and the larger the standard deviations, the better the specific predictions will be. Thus customizing the time frame is needed.
A binary options trader will probably be working on charts representing just one hour of activity. If you take a foreign currency pair like the USD/JPY when this rate comes into contact with a lower band, there may be a market sentiment for a return toward the upper band. This may be the time to buy a CALL. On the other hand, when the USD/JPY binary options asset price reaches the upper band, at that moment consider buying a PUT.
Spend time observing price action through Bollinger bands. You have to develop a feel for the momentum if the price is reverting around its’ moving average or if the option is moving in a new channel up or down. Successful traders have developed their skills within 95% of their trades.
Some signal services provide support and resistance numbers during daily analyses, and these can be used to define either channels or breakouts. This will enhance your trading results.