Bollinger Bands are among the most powerful and flexible trading tools available to those who trade binary options. This indicator was developed by John Bollinger back during the 1980’s and it records one of his greatest observations. The concept that volatility was not fixed, that it changes daily, a line of thought that was quite opposite the popular belief of traders at the time. The bands are in many ways similar to moving averages, channels, and similar indicators, but are centered around measurements of volatility within the markets.
The bands are produced from a typical difference of price activity over a fixed time period, similar to fundamental volatility indicators like historic and relative volatility. The general opinion seems to be that Bollinger Bands are the best tool for gauging volatility, but provide the added benefit of being very easy for trading to fully grasp. This tool can be utilized in a variety of ways, while providing of a variety of easily identifiable signals and may be utilized as a stand-alone indicator or in conjunction with a bundle of other methods.
The tool is designed to display when asset prices are either high or low compared to past price activity. This suggests that prices are viewed as being high when positioned near the upper band and low when positioned near the lower band. Three lines are presented. The first will be the central line, typically a SMA that is commonly set to a period of 20 by most binary options traders. The data applied for the center line is employed to generate the other two bands. These will be a standard deviation of the main line, normally 2 but adjustments can be made.
Due to the fact the bands are centered around a standard deviation of underlying asset price movement, they are remarkably good at detecting volatility within the marketplace and will change along with the sentiment of investors. The bands broaden whenever volatility levels are high and contract whenever volatility levels are low. The signal to enter the market can be presented whenever prices arrive at, cross or surpass any of the bands or whenever the bands broaden and contract, or even a mix of the two. Since these signals are not linked to any trend, they are suitable for short-term trading.
The simplest use will be linked to trading along with the increases and decreases in volatility levels. In comparison to price action and various other indicators, these shifts can be strong verifying indicators. When the bands expand right after a time period of shrinkage and the asset price moves to reach either band, this can be viewed as a signal of price direction. There could be a pullback right after the first contact, but provided that prices do not excessively go beyond the bands they can be estimated to keep on moving in that direction over the short-term.
Essentially, Bolligner Bands provide boundaries where the market is regarded as being over or under priced. Normally, when prices surpass the band on either side this indicates that market has moved too quickly and prices are either very high or very low and likely to soon pull back. This signal is particularly good for short-term trades. When combined with indicators such as Fibonacci or other support/resistance, these bands can provide those who trade binary options with excellent insight related to upcoming price movement.
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