Strategies


TRADING BINARY OPTIONS WITH BOLLINGER BANDS - STRATEGIES AND HINTS

One of the most popular trend indicators, the Bollinger Bands indicator was developed by John Bollinger. To this day, traders use it mostly to ride a trend. However, that’s not the only way to trade with it. And, when it comes to binary options, we must be aware of the time frame used so that we can adjust the expiration date.

 

Riding a Trend with the Bollinger Bands Indicator

Before starting, we should agree on one point: binary options trading differs from Forex trading. It stands alone as a different way to approach the market. As such, the tools used in binary trading are limited. Therefore, one of the most critical conditions is to be disciplined and to respect the trading plan.

A trend differs in its length and structure. Because of that, when trading with trend indicators like the Bollinger Bands, we should use only limited setups. Or, like it was the case with the moving averages, only the first two trades that come up.

The indicator has three lines: the UBB (Upper Bollinger Band), the LBB (Lower Bollinger Band) and the MBB (Middle Bollinger Band). All of them are of equal importance and what’s important is that they contain the price most of the times. The MBB is a moving average. Ideally, it is an EMA (Exponential Moving Average). Why is that?

When compared with a simple moving average, the EMA reduces the lag between the price and the average. As such, traders get earlier entries into the market. In a bullish trend, the Bollinger Bands have the advantage of making it visible. It is impossible to miss the new trend if you pay attention to the details.

In the video dedicated to this part, we present the steps needed for trading binary options with the Bollinger Bands indicator. Being a trend indicator, any trading platform applies it directly to the actual price. In contrast, an oscillator gets to be displayed in a separate window, typically below the price.

As traders, we should define what makes a bullish or a bearish trend. With that in mind, we’ll use the UBB and the MBB in a bullish setup. And, the LBB and the MBB in a bearish setup. In the first instance, we want to buy call options, while a bearish scenario calls for put options. Again, the expiration date depends on the time frame we use.

Any trading platform offers the Bollinger Bands, so you won’t have any difficulties in finding it and attach it to a chart. After that, the key is to look for the first time the price breaks and closes above the UBB or below the LBB.

That’s the signal that a new trend started. Next, look for the first two pullbacks into the MBB. Trade call options in a rising trend and put ones in a bearish trend. But, make sure you give the options enough time for the expiration.

Nevertheless, a disciplined approach requires two trades and two trades only. Never mind that in our example the trend was so strong that it could’ve offered plenty of other call options. What we use is a setup that is supposed to work most of the times. Not only sometimes.

Therefore, imagine the potential of this simple approach when applied on different timeframes and different financial products. Of course, not all options will expire in the money. There’s no such setup as to have one hundred percent winning trades.

But, it is important to have more winners than losers. For this, we need to stay disciplined and focus on the probabilities. Is this the only way to use the Bollinger Bands indicator? No, this is just the most common way.

However, these bands also measure volatility. That’s when the market spikes or dips before significant economic events. The next video shows how to use it to measure the volatility of a financial product and how to trade binary options following a logical process.

 

 

In this second part dedicated to the Bollinger Bands indicator, we start with another example using the AUDUSD pair this time. We simply apply the same concept as described in the first part, only to demonstrate the power of the two signals generated by that Bollinger Bands approach.

The reason for these examples on the AUDUSD is to reinforce the power of the Bollinger Bands when used as a trend indicator. Consider the previous EURUSD example and now the AUDUSD and you’ll come to understand why only the first two signals are enough for the striking prices using this approach.

However, the Bollinger Bands indicator is a great tool to address volatility. It is particularly the case when significant economic events are due to come out.

 

Bollinger Bands as a Volatility Indicator

Volatility is more important on the Forex market than on the binary options one. Because keeping a position open on the Forex market comes with costs (most currency pairs take a negative swap from the trading account), traders try to avoid opening positions in a consolidation area.

It’s not the same in the binary options industry. If the option is in the money, no one cares if it moves or consolidates. But, what if there’s a way to tell when the price will break? Or, at least a way to know when a break comes?

 

Trading Breaks with Bollinger Bands

The Bollinger Bands indicator is sometimes called a breakout indicator. Have you ever wondered why? The UBB and LBB were designed to measure the volatility of a financial product. Be it an equity, a currency pair or an index; the two bands tell us when a break is about to come.

As such, binary options traders can prepare. But, before anything, traders must have a plan to trade breakouts with the Bollinger Bands indicator. For example, let’s consider the NFP (Non-Farm Payrolls) week. Typically, the price doesn’t go anywhere until the Friday’s release.

The way to trade binary options in the NFP week is either to wait until the Friday’s release or to set expiration dates for your options that are longer than the actual release. A currency pair, for example, will only consolidate. I’m talking here about a major pair, one that has the USD in its componence.

The way to prepare for a break is to apply the Bollinger Bands on a chart. Just like we did with the AUDUSD pair in the video dedicated to this article. 

Next, only look for the distance between the UBB and LBB to shrink. That’s an indication volatility is subdued, and a strong move will follow. Trading an option when this happens is a gamble. Or, we want to avoid that.

The way to trade is to wait for the news to come out. When this happens, the price will move beyond one of the two Bollinger Bands. Still, don’t do anything. Just wait for the candle to close.

The idea is to buy a call option on a close beyond either the UBB or the LBB. However, we need to wait for the actual close before anything. When the market breaks out after a significant economic release, it also gives false signals. The price may very well jump or dip beyond the two bands, only to reverse and go in the other direction before the candle’s closing.

Therefore, it is important to wait for the close. If the time frame is the four-hour one, just wait for the close and then trade a binary option with an adjusted expiration date.

 

 

Conclusion

To sum up, the Bollinger Bands indicator offers a disciplined way to approach the market. As traders, we want to be on the right side of the market, as much as possible. As trading is a game of probabilities, and the market changes all the time, being right isn’t easy. But, it is easier than being disciplined.

Only a disciplined approach leads to profits. In the case of the Bollinger Bands indicator, both methods presented here result in almost perfect striking prices. The key is to integrate the signals with the right money management system, and you’re in for a wild ride.

 

 

Risk Warning: Trading may not be suitable for everyone, so please ensure that you fully understand the risks involved. Especially trading leveraged products such as Forex and CFDs carry a high degree of risk to your capital and can result in the loss of your entire capital. Only invest with money you can afford to lose.