Bollinger Bands

Bollinger Bands




When new traders ask can Bollinger Bands help with Binary Options Trading and/or Forex?

You need to know and understand the indicator.

Used by a lot of traders, so a very popular technical analysis indicator, and created by John Bollinger in the early 1980’s it the Bollinger Bands indicator.

Bollinger Bands indicator

The Bollinger Bands indicator is an oscillator meaning that it operates between or within a set range of numbers or parameters. As previously mentioned, the standard parameters for Bollinger Bands are a 20 day period with standard deviations 2 steps away from price above and below the SMA line. Essentially Bollinger Bands are a way to measure and visualize volatility. As volatility increases, the wider the bands become. Likewise, as volatility decreases, the gap between bands narrows.

Bollinger Bands indicator

The indicator is made up of a band of three lines that are plotted in relation to security prices.

The Simple Moving Average (SMA) line in the middle is set to a period of 20 days, the SMA then serves as a base for the Upper and Lower Bands.

These Upper and Lower Bands are used as a way to measure volatility by observing the relationship between the Bands and price.

The Upper and Lower Bands are set to two standard deviations away from the SMA (The Middle Line); however the number of standard deviations can be adjusted by the trader.

Volatility & Expansion

Volatility can be seen as a cycle, usually over periods of time with low volatility and steady or sideways prices which are known as contraction are followed by period of expansion.

Expansion is a period of time shown by high volatility and moving prices. Periods of expansion are then sometimes followed by periods of contraction. It is the cycle in which traders can be better prepared to navigate by using the Bollinger Bands indicator because of it’s ability to monitor ever changing volatility.

Bollinger Bands indicator

Price breaking below the Lower band or breaking above the Upper Band can sometimes signify a buying or selling opportunity.

During a strong downtrend price may be touching or breaking through the Lower Band. When this occurs, it can be a buy signal, a result of the overall strength of the particular move.

During a strong uptrend, price may be touching or breaking through the Upper Band. When this occurs, it can be a sell signal,  a result of the overall strength of the particular move.

High & Low

One thing about Bollinger Bands is that they can provide a relative definition of high and low.

Bollinger Bands indicator

Prices are usually contained within the band. When prices move up near the upper band or break through the upper band, a trader will see that particular security as being overbought giving a possible selling opportunity.

When prices move down near the lower band or break through the lower band, that particular security a trader will see that particular security as being overbought, giving a possible buying opportunity.

Bollinger Bands can give a trader useful insight into shifts in volatility.  Bollinger Bands should be used in conjunction with other indicators to get a better understanding of the changing market.

 

*Please Note, Binary Options and Forex trading can carry a high level of risk to your capital as you could lose all of your investment. These products may not be suitable for every investor, therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose. We are NOT financial advisers and we do NOT offer financial advice.