Bollinger Bands are a helpful indicator for binary options traders due to the fact that they detail the current volatility level within the marketplace for specific assets. This indicator is not typically used as part of a detailed strategy, but by pinpointing higher or lower levels of volatility it can help traders decide the correct strategy and instrument to use. This ability alone makes it an extremely valuable tool for anyone who hopes to profit from asset price movement.
Bollinger Bands consist of two bands and one Simple Moving Average. A price chart, such as MetaTrader4 will need to be used in order to view this indicator. Viewing and understanding these bands is very simple. The closer they are together, the less volatile the market is. This can indicate that the price will soon start to move strongly. The further apart they are, the more volatile the conditions. This is not necessarily a bad thing, as the asset price could be strongly moving in a single direction, which makes movement prediction an easier task.
Are there any drawbacks to the use of this indicator? Not really. However, traders do need to remember that these bands only point out volatility levels and not the forthcoming direction of asset price movement. Should volatility become extreme while a trade is open, those who trade with a binary options broker that offers the “Close Early” option can sell off the open position and exit the market. The only other potential negative is the fact that this indicator does nothing to reveal areas in which the price may stop and reverse direction.
Advantages include the fact that even new traders will be able to clearly understand what it means when the bands are close together or far apart. Bollinger Bands can highlight large price movements very accurately. When used along with other tools or indicators, they can give traders some sense of the upcoming direction of movement. Lastly, there is no cost to use or view them, so long as free charting software is being used. Typically, they are cannot be viewed within the price charts provided by most brokers.
Speaking of charting software, Bollinger Bands can easily be installed when using MetaTrader4. This software is free and can be downloaded from various sources online. To view these bands within a MT4 chart, click “Navigator > Indicators > Bollinger Bands”. The Simple Moving Average is 20 periods by default. Novice traders will do well with this setting, but note that it can be changed and should be in accordance with different trading styles and strategies.
In review, whenever a strong price movement in a single direction is taking place, the bands are going to be spaced far apart. Limited price movement is revealed during times when the bands are spaced close together. This information provides the foundation for optimal instrument, or trade type selection. It should also be viewed prior to selecting the appropriate binary options strategy to pair with chosen asset and current market conditions.
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