Binary Options with Bollinger Bands

Binary Options with Bollinger BandsBollinger Band analysis is a binary option analysis tool that was established by and named after popular modern day technical investment analyst John Bollinger. These bands are typically plotted two standard deviations apart from the simple moving average. They aim to show assets volatility by the location of the bands; if a Bollinger Band is moving away from the average it indicates that the market for the asset is increasing in volatility and if the Bollinger band moves closer to the averages then it indicates a much less volatile trend.

So how can volatility be used as a technical indicator for puts and calls when purchasing binary options? Volatility is often associated with risk and directly refers to the measure of uncertainty or risk about the range of changein a security assets value. Higher volatility indicates that anassets value most likely will be spread out over a broad range of values; this means that price change of an asset has the potential to change very dramatically in a short period of time upwards or downwards. An asset that has low volatility often tends not to change that much and often remains steady over a short period of time.

So when it comes to purchasing binary options, the trick is picking a volatile asset and whether you think it will trend upward or downward. Bollinger Bands are often the key technical chart that is used for this purpose.

Most investors who use Bollinger bands to make predictions think that when charted prices are staying between the middle and upper Bollinger bands, then the assets market will trend upward. If the opposite is true and the assets price stays between the middle and lower Bollinger band, this often signifies the market will continue to trend toward the downside.

How does one then make a decision on whether to buy puts or calls on binary options from this information? Most investors will buy call options when the price is in an uptrend and nears the middle Bollinger band and buy put options when the price is trending downward and nears the middle Bollinger line.

It is often also said thatBollinger bands help traders capitalize on oversold conditions by spotting asset prices that go below the lower Bollinger band and then trend back toward the center Bollinger band. If this correction is predicted at the right time it can be very profitable for an investor

While it is cautioned that as always there is no sure thing when it comes to predicting market trends, Bollinger bands seem to becoming one of the most popular technical tools used to spot potential extreme short term price changes in a security asset.

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References and Further Reading:

1. Financial trading system and method for entering maximum sized orders (A Sheldon – 2011)

2. Intraday forex bid/ask spread patterns-Analysis and forecasting (A Paukste, A Raudys – 2013)

3. Optimization of technical trading rules in forex market using genetic algorithm (PF Silva – 2012)

4. Risk and Return in Retail Forex (A Karbalaee – 2012)

5. Noninterest Income Generating Activities and the Future of Banking (C Calmès, R Théoret – 2014)

John Miller
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John Miller

John has worked in investment banking for 10 years and is the main author at 7 Binary Options. He holds a Master's degree in Economics.
John Miller
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