Whether you want to make a short-term or long-term trade, information technology’s essential to arm yourself with the correct trading strategy for increasing trade profitability. Having a detailed trading strategy decreases the risk of losing money and increases conviction.
Merely which trading strategy should you choose? Well, you lot tin consider using the Bollinger Bands trading strategy considering it’s piece of cake to use. The simplicity of this strategy makes it manageable for traders to get a meliorate understanding of the marketplace.
Below are some of the details of this strategy that volition help you understand how to summate Bollinger Bands, how you can merchandise with this strategy, and what its limitations are.
What yous will read in this Post
What is the Bollinger Bands trading strategy?
Bollinger Bands is an essential trading tool that makes binary options trading unproblematic, constructive, and quick. With the help of this simple-to-empathize tool, yous tin easily predict the market in a few seconds.
John Bollinger created this trading strategy. Bollinger Bands works by forming a channel around price movement. Hither, the channel is based on moving cost average and standard deviation.
This trading indicator is generally used for short-term trading. That’s considering Bollinger Bands indicates low market volatility. Also, it gives a signal when the market starts moving.
The piece of work of Bollinger Bands indicator is to predict the price of the market place on the footing of by market data. Bollinger Bands represents data past drawing three lines later analyzing, aggregating, and computing the past records. These iii lines are known as bands.
An upper line
The upper line in the trading chart is the upper finish of the predicted range. It is a upshot of the standard deviation plus moving average. The sum is then multiplied by a factor. Hither, the upper line works as a stiff resistance.
A lower line
The lower line in the chart results from standard deviation minus moving average and multiplied by a gene.
In the nautical chart, the lower line represents the lower stop of the predicted range. Also, it works every bit strong support.
A middle line
Lastly, you will see a eye line, which is mainline. The eye line in the chart is the moving average, and it acts as an boosted bulwark.
This line works as support when the marketplace is trading below. As well, it acts as a resistance when the market is trading above.
The Bollinger lines predict three things.
- It shows whether the trading market volition stay inside the outer lines or non.
- Side by side, it shows that when the market place reaches the middle line, it will slow downwardly. Just sooner, the line will breakthrough.
- Lastly, the lines betoken that when the marketplace moves between two lines, the motion will continue until it reaches another line.
In simple terms, the piece of work of Bollinger Bands is to help the traders understand when the right time is to enter and go out the market place. It is done by analyzing the nugget- whether it’s oversold or overbought.
What practice the Bollinger Bands tell y’all?
Bollinger Bands is ane of the few popular trading techniques that both new and experienced traders can utilize. This technical assay tool is nonetheless standing strong considering it’s non complicated like other trading indicators.
If the cost of an nugget in the market is moving shut to the lower ring, information technology means oversold. Similarly, if the price is most the upper ring, it indicates overbought. Additionally, when the market is less volatile, the ring contracts. And when the market is more volatile, information technology widens.
Squeeze
Squeeze is i of the concepts of Bollinger Bands. Squeezing happens when bands come closer. When yous notice a squeeze in the market, you can conclude that market volatility is less.
Many traders similar this situation because they believe squeeze indicates future trading opportunities and increases market volatility. Moreover, if the band moves autonomously, it decreases volatility and offers excellent trading possibilities.
One thing you lot must call up is that the bands do not give any kind of trading signal. That means it’southward difficult to sympathize when the alter will take place.
Breakouts
The price motion of an asset takes identify between ii bands. That’s why when there is a breakout, information technology is observed as a major outcome.
Although breakout in Bollinger Bands is seen as a significant event, it’due south not a trading signal. And so, when there is a breakout, you should not rush to purchase or sell assets,
How to calculate Bollinger Bands?
For calculating Bollinger Bands, y’all need to figure out the moving average of 20 days. The endmost prices for the first 20 days are the offset data point. Additionally, the adjacent data point will be the earliest price drop, i.e., the toll of day 21 and the post-obit days.
Hither’southward a simple formula for calculating Bollinger Bands.
BOLU=MA(TP,northward)+m∗σ[TP,north]
Bold=MA(TP,n)−m∗σ[TP,northward]
BOLU is upper Bollinger Band.
BOLD is lower Bollinger Band.
MA is moving average.
TP is typical price, i.eastward., (high + low + close) divided by three.
due north is the number of days in the smoothening period.
g is standard deviations.
σ[TP,n] is standard deviations of the last n menses of TP.
Using this formula, yous can hands calculate Bollinger Bands and utilize it for binary options trading.
How do Bollinger Bands work?
Here’s a quick instance to empathise how Bollinger Bands work.
Allow’s assume that the price of fruit is $ten. After a while, its price suddenly increased to $11. When the price all of a sudden increased, only a few people purchased information technology. That’s why the price of a particular fruit came back to $10.
Similarly, if the price of that fruit suddenly drops to $nine, its demand volition increase. The surge in demand for the fruit volition once again bring its price back to $10.
Through these examples, you lot can conclude that a sudden change in the price of an asset is temporary. That’s why in that location is ever a slow alter in the toll over time.
What Bollinger Bands does is that it reflects this assumption. This trading indicator adapts dynamically to the price change in the market. The toll change of avails too changes its volatility.
Here, the middle line, i.due east., moving average,
indicates long-term cost modify. On the other hand, lower and upper lines create a space where price fluctuates.
So, when the price moves towards the upper ring, you tin can understand that the
asset is getting expensive.
And if information technology moves towards the lower ring, it becomes cheap.
In short, Bollinger Bands helps in agreement market psychology. When you lot accept a better marketplace understanding, you make improve investments.
Why should you lot apply Bollinger Bands with Binary Options?
Equally you know how Bollinger Bands works, let’s see why you should use them. Here are four reasons to use this trading tool.
New trading opportunities
When the cost of an asset approaches one of the Bollinger Bands, it shows how the trading market place is behaving. This information tin assistance yous discover new trading opportunities.
Brand more money
With the help of Bollinger Bands, you tin understand how far the trading marketplace is capable of moving. When making a trade, you lot tin further use this prediction with binary options like i-touch options and ladder options.
So, by using the predictions of Bollinger Bands, you can turn an ordinary trading opportunity into a profitable one.
Avoid bad trades
The binary options market is volatile, and it tin surprise you when you lot are to the lowest degree expecting any changes. But you lot tin keep yourself safety from making bad trading decisions.
For this, y’all don’t necessarily take to use Bollinger Bands. Yous tin can simply understand how unlike lines work in this trading tool. When y’all have this information, you lot tin can easily avoid bad trades.
It is simple
Bollinger Bands is a simple trading indicator that can aid you lot do a technical assay of the binary options trading market place. Yous tin can have a quick look at the chart to empathize the market place through Bollinger Bands.
Non to mention that y’all can do the complete market assay in just a few seconds. That’s why traders employ Bollinger Bands for short-term trades.
How to trade with Bollinger Bands?
Here are three smart ways to trade binary options with Bollinger Bands.
Bullish Breakout
Bollinger Bands forms a bullish breakout when the market place price of an asset closes above the upper line in Bollinger. When you discover this breakout, you can opt for a call option.
Bearish Breakout
Bollinger Bands forms a bearish breakout pattern when the price closes below the lower line. In this case, you can place a put option.
Range Market
Bollinger Bands forms a range marketplace when the price of an asset stays inside the range mode. If the price remains inside the range for a while, you tin can win a trade.
Limitations of Bollinger Bands trading strategy
While Bollinger Bands has multiple advantages, in that location are certain limitations as well.
- Bollinger Bands is limited to merely 1 indicator. That means you must use this trading tool with a few other indicators for generating an accurate result.
- It does not offer well-detailed marketplace data all the fourth dimension.
Conclusion
Bollinger Bands is more than of a tool than a trading indicator. And but like other tools, even it has some flaws. But it is one of the finest tools that you can utilize to understand the market’s beliefs.
Y’all tin can thoroughly understand the Bollinger Bands formula and what its lines represent to notice better trading opportunities.
Also, to go amend results, you lot tin use Bollinger Bands with some of the leading brokers like Quotex, IQ Option, Binary.com, and RaceOption.
Source: https://www.binaryoptions.com/strategies/bollinger-bands-strategy/
