Bollinger Bands Explained – Formula And Indicator Tutorial
Bollinger Bands and binary options form a great combination that makes trading the financial markets simple, quick, and effective. Bollinger Bands provide a deep yet simple-to-understand look into the market’s soul; binary options are the ideal tool to trade the predictions that this look creates.
In this article, you will learn:
What Are Bollinger Bands?
Why Do Bollinger Bands Work?
Why Should Traders Use Bollinger Bands?
With this knowledge, you will immediately be able to trade binary options based on Bollinger Bands.
What Are Bollinger Bands?
Bollinger Bands are a technical indicator. They predict future market movements solely based on past market data, which they aggregate and calculate. The result is drawn directly into your price chart.
The indicator creates three lines, which are commonly referred to as “bands“:
A middle line. This is the main line. It is a moving average, commonly based on 20 periods.
An upper line. This line is the result of the moving average plus the standard deviation multiplied by a factor, commonly two.
A lower line. This line is the result of the moving average minus the standard deviation multiplied by a factor, commonly two.
These three lines predict the range in which the market is likely to move.
The upper line is the upper end of the predicted range. It works as a strong resistance.
The lower line is the lower end of the predicted range. It works as a strong support.
The middle line is an additional barrier. It works as a resistance when the market is trading above it, and as a support when the market is trading below it.
In real-life trading, Bollinger lines predict three things:
The market will remain inside the two outer lines.
When the market approaches the middle line, it will slow down, but can eventually break through it. It can also turn around.
When the market is moving between two lines, it will continue its movement until it reaches the next line.
All of these predictions are tradable, and binary options make trading them easier and more profitable than most other assets.
Why Do Bollinger Bands Work?
To understand the idea behind Bollinger bands, consider these examples:
If an apple was priced at £1 for a while and suddenly became more expensive, for example £1.20, fewer people would buy it. This drop in demand would bring the price back to £1.
If an apple was priced at £1 for a while and suddenly became cheap, many people would start buying apples instead of other fruit. This surge in demand would bring the price back to £1.
Now, these examples do not say that the price of an apple will never change. It can change – slowly and over time. Rapid price changes, however, are short-term fluctuations. Unless there is a catastrophic event, market psychology requires price changes to take some time.
Bollinger Bands reflect this assumption. The moving average that creates the middle line is the long term price change. The upper and the lower lines create the price channel in which the price can fluctuate.
When the market approaches the upper band, you know that traders will soon think, “This asset is getting too expensive.” Demand will drop, and prices will fall back closer to the middle line.
When the market approaches the lower band, you know that traders will soon think, “This asset is really I should buy it.” Demand will surge, and prices will climb back closer to the middle line.
In short, this technical indicator helps you to understand market psychology without having to talk to every trader out there. This understanding helps you to make better investments with a quick, simple look at your price chart.
Why Should Traders Use These Bands?
Bollinger Bands can be a great help for binary options traders. They can do three things for them:
Find new trading opportunities. When the market approaches a Bollinger band, you know that the market is likely to turn around. This knowledge alone is enough to win a binary option.
Make more money with your strategy. Bollinger bands provide a clear indication for how far the market can move. Binary options types with high payouts such as ladder options or one touch options require this prediction, which is Bollinger Bands can turn an ordinary strategy into a highly profitable one.
Help you avoid bad trades. Bollinger bands form important resistance and support levels. Even if you decide to not directly trade Bollinger Bands, you should at least be aware of these levels. Otherwise, you might be surprised when the market does something unexpected, and you lose a trade you believed to be a sure winner.
In addition to these three reasons, there is another aspect that makes Bollinger Bands so attractive – they are simple. All you have to do to interpret Bollinger Bands is take a quick look at your price chart. There is almost no chance to get it wrong, and you can finish the entire analysis in a few seconds. Traders who analyze many charts simultaneously love Bollinger Bands because they provide such clear predictions in such a simple way.
Bollinger Bands are a great tool for binary options traders. At a glance, they provide a deep look into the thought process of all traders and the psychological processes that drive the market. This knowledge can help you find new trading opportunities, make better trades, and avoid bad trades. Any trader can profit from adding Bollinger Bands to their chart, even if they are only using them indirectly to better understand the market.
Traders can also base their entire trading strategies on Bollinger Bands. Our strategy pages include 3 Bollinger Band strategies
If you like binary options, Bollinger Bands will help you to trade better. If you like Bollinger Bands, binary options provide you with a great tool to trade their predictions.