Trading Binary Options using the Bollinger Band Strategy
Posted On May 9, 2020
The Bollinger band strategy is one of the best strategies to use when trading binary options, because it creates clear signals that can be used to buy and sell the market in the form of above or below options. Range binary options and one touch options can also be used to form a strategy using the Bollinger bands.
Bollinger Bands are a mean reversion technical indicator that is used to inform a trader when the market has potentially over stretched and there is likelihood that it will snap back. There are a number of different technical indicators that can be used to track mean reversion, the Bollinger Bands in one of the most prolific. Bollinger Bands (named after John Bollinger) are a statistical measure beyond a specific moving average. The measurement normally used is 2 standard deviations which create a channel around the moving average where 95% of all trades given the last 20 days will fall. The most often used moving average which creates the best returns is the 20 day moving average. When following a specific financial instrument, it is important to customize the moving average and standard deviations to create the optimal channel. The Bollinger band strategy can be used with any type of moving average and any standard deviation. A longer the moving average along with a larger standard deviation will provide fewer signals that potentially could be more reliable.
A trader will also have to determine the appropriate length that works well with binary options. An hourly chart matches up to a number of different brokers (market makers) that use and hourly time frame when creating their options. In the chart below the USD/JPY is displayed using an hourly chart. The Bollinger band technical indicator is overlaid, and the signals that are created are labeled. When an hourly price bar crosses below the USD/JPY Bollinger band a trader can set an above option or call to speculate that the market will be above a specific level. In the five examples below, all seem to snap back over a short period of time. On the flip side, a trader can place a below option (put) when the price bar crosses above the high Bollinger band range. In the five example below, each instance the market moved lower over a short period of time. The key to this strategy is the ability of the trader to find the correct period of time to place the binary option.
Additionally, a trader can speculate that prices will not continue lower (a miss options), or that the prices will move into a specific range (a hit range option) over a period of time. For a miss option, when the price bar hits a Bollinger low, place a miss option below that level. The same can be accomplished when the market hits a Bollinger high. For a hit range option, a trader can place that range above the market on a Bollinger low, and below the market on a Bollinger high.
This strategy can be customized and back tested, but a trader should consider testing this strategy since it creates strong signals.
- What are Bollinger Bands ?