Bollinger Band is a binary options analysis tool that was developed and named after popular modern day technical investment analyst John Bollinger. These bands are usually plotted two standard deviations apart from the usual simple moving average. The goal is to discover asset volatility by the location of bands; if the Bollinger Band is moving closer to the average it indicate that the market for the asset is decreasing in volatility and if the Bollinger bands move away from the average then it indicates a more volatile trend.
So the question is, how can volatility be deployed as a technical indicator for calls and puts when trading binary options? Volatility is usually associated with risk and directly translate to the amount of risk or uncertainty about the range of change in a security asset value. So, higher volatility indicates that an asset value will most likely be spread out over a brand range of values which literarily means that the price of an asset can potentially change in a dramatic manner downward or upward within a short period of time. An asset with low volatility often remain steady over a short period of time and tend not to change that much.
The trick, however, when it comes to binary options is picking volatile assets and the trend direction. Bollinger Bands are often the major technical indicator that is used for this particular purpose. So Bollinger band can help you in picking a volatile asset and forecasting either an upward or downward trend for a successful binary options trade.
Some experienced investors who use Bollinger band for trading think that when charted prices of assets are staying between the upper and middle Bollinger bands, then the asset market will probably trend upward. On the other hand, if the asset price stays between lower and middle Bollinger, then the market will probably trend downward.
So you might ask: how does one arrive at a final decision on whether to buy calls or puts on a binary options trade from this information? Most shrewd investors will buy call options when the asset price is in an upward trend and is close to the middle Bollinger band and buy put options when the asset price is trending downwards and is close to the middle Bollinger line.
It is also a general knowledge that Bollinger bands helps investors take advantage of oversold conditions by pinpointing prices that go below the lower Bollinger band and then trend back up towards the center Bollinger band. Accurately predicting this correction at the right time could result in an immensely profitable trade for a trader.
While it is true that there is no sure thing when it comes to forecasting market trend, Bollinger bands are fast becoming one of the most common technical tool deployed for spotting potential extreme short term price movement in a security asset.
Cover Image via Stefan Erschwendner