The name of this indicator comes from John Bollinger, a famous analyst contemporary with us and it shows, of course, trending markets. Therefore, if you are analyzing the markets using the Metatrader platform, the Bollinger Bands indicator is to be found in the Trending indicators category and therefore it should show important support/resistance areas or places to buy call options in a rising trend or put options in a falling trend. The Bollinger Bands indicator has, of course, two bands. Actually, to be more exact, it has three bands, but the one in the middle is a tricky one as some brokers are showing it as a 20 period SMA (Simple Moving Average) and others are showing it as a 20 EMA period (Exponential Moving Average). Out of the two I would favor in a heartbeat the EMA as the middle Bollinger band as the EMA it is adapting all the time to new market conditions.
Out of the two I would favor in a heartbeat the EMA as the middle Bollinger band as the EMA it is adapting all the time to new market conditions.
Bollinger Bands Interpretation
The standard interpretation of the Bollinger Bands is that while prices are staying between the middle Bollinger band and the Upper Bollinger band the market is trending to the upside and when price is moving between the Lower Bollinger band and the middle one, market is trending to the downside. To be more exact, when in an uptrend, when price is reaching the middle Bollinger Band (or the EMA), we should buy call options, while when in a downtrend, when price is reaching the middle Bollinger Band, we should look to buy put options.
Expiration Dates With Bollinger Bands
The expiration dates are solely dependent on the time the indicator is being placed and the two video recordings that area coming with this analysis are showing you more details about how to place the indicator on a chart and, more importantly, how to trade binary options with it. Being a trend indicator it can be used to buy the dip and sell the spike in bullish or bearish markets and the thing is to buy call options when the EMA is being tested in a bullish trend and put options when the EMA is being tested in a bearish trend. A nice strategy that works with Bollinger Band indicator is to split your investment into different parts.
For example, let’s assume we are trading 100$ and want to find the perfect striking price for our option. After applying the indicator on the hourly chart let’s say and on our financial instrument that we want to trade (let’s say the eurusd currency pair) the thing to do is to split the resulting channel into multiple parts. I mean, it is always being split into three parts, the upper side and the lower side of the channel, but if the trend is a bullish one, then the thing to do is the split the lower side of the channel, basically the small channel that is forming between the EMA and the LBB (Lower Bollinger Band) into three different parts, at equal distances.
Choosing the Investment Amount
The next step is to split the amount to be invested (in our case the 100$) into four different parts and as a consequence we’ll have 25$ for each and every call option we want to trade from the four levels we mentioned above. The expiration date for the first option by the time price is reaching the EMA should be bigger than the expiration date for the other options as price should jump more aggressively the more it dips as after all we’re talking about a bullish trend.
The opposite is true as well with the sole difference that we’re talking about a bearish trend and instead of call options as mentioned in the example above, put options should be traded but finding the perfect striking price should follow the same process. Trading is not an easy task especially when it comes to the fact that markets are not really trending that much as ranges are everywhere. This is why, when looking at trend indicators as the signal providers for your options and striking price, consider avoid the cross pairs (the ones that do not have the US dollar in their componence) as crosses are travelling way less than majors.
In this way the danger of overtrading is disappearing and the ideal timing when looking to fade a move (buying the dips and selling the spikes represents in reality a fade of the move, so being a contrarian) is when economic news are released. Look for the economic news out of US and the other major economies to influence markets as the vast majority of products offered for trading by binary options brokers are being formed by currency markets or equity indices from the world’s most developed economies.
The two video recordings that are coming with this chapter on our Binary Options Academy are showing you how to plot the Bollinger Band indicator on a chart and moreover how to apply the strategy explained here.