Bollinger Bands Principle
The Bollinger Bands (hereinafter BB) is a technical indicator on the chart, which consists of 3 moving averages, tapering at the quiet market and expanding at a price increase. The central line is a moving average with a standard period of 20 candles, and the other two are middle lines shifted by a certain number of standard deviations, and thus forming a kind of corridor. The signal to purchase or sale of asset is breaking of upper or lower band of this corridor.
Creator of BB is John Bollinger, a mathematician, a successful trader, owner of several companies, stock analyst, creator of the first US site dedicated to technical analysis called equitytrader.com and author of the global financial bestseller, translated into 11 languages - “Bollinger on Bollinger Bands”.
BB is an excellent volatility indicator, the real jewel in the financial world and in the binary options market, in particular.
Bollinger Bands use strategies in binary options
BB for binary options is considered to be one of the most effective indicators.
The indicator behaves best in the 5- and 15-minute intervals. Using BB on the minute timeframes is also acceptable, but it is always better to check the data on longer charts.
There are three main BB use strategies for binary options:
• breaking band;
• walking band;
• W and M-shaped figures.
Also, the relevant BB application in conjunction with other technical indicators, such as MACD and Price Oscillator.
The Breaking Band
This BB use principle is quite simple and based on the alleged trend reversal. For example, if a candle broke the corridor lower band, i.e. the asset price can go up. Similarly, if we observe the upper corridor break, the asset price is likely to fall.
However, the use of this technique is effective only in the peaceful trend, when the trend fluctuations are not significant, without the strong peaks and breaks. With a distinct trend, the BB corridor break means that the trend will continue its movement in the same direction.
The Walking Band
What tells us the break of the upper (Bollinger Band Up, BBU) and lower (Bollinger Band Low, BBL) boundaries of the corridor, constructed by BB? They tell us that:
the trend direction will change;
the trend movement will continue in the same direction.
This latter situation is called – movement or walk on band (the Walking Band).
Price steadily moves in one direction, with each break is accompanied by the corridor boundary followed by a slight rebound. If there were several trend fluctuations, it confirms that trend is unlikely to change. The best BUY time during such a trend is the moment of price rebound to the middle band.
When walking the band, each trader has a logical question: When will the trend reverse? John Bollinger has the answer.
W- and M-shaped figures
There are more than 45 figures, but don’t let this discourage you. They have a similar principle. Let’s start with the letter W.
The principle of this strategy is very simple and is in the trend formation in the form of W at the bottom of the chart. Trend falls down, hits the BBL, makes a rebound and goes down again, but this time without a break. If the trend band does not break the corridor boundaries again, there will be a reversal with the price asset goes up sharply.
M-shaped figures are essentially reversed W ones, but they are located at the BBU. The M principle is reflecting. If the second trend peak does not hit the BBU, and the subsequent price fall is greater than the average rebound, it means that the trend has gone down.
There is another version of M figure, when the peak of BBU does not break. In this case, the second peak will be lower than the previous one.
The binary options BB indicator settings
In John Bollinger’s legendary book he recommended not to change the indicator default settings, and, probably, he was right. The indicator has been developing over 10 years, during which a thorough technical analysis of hundreds thousands of transactions was carried, and its results became the indicator’s basis. Therefore, the default settings set by the creator are considered to be optimal, with all options are available to change.
The most important settings affecting the indicator are in the ‘Inputs’ menu. ‘Style’ and ‘Properties’ menus are responsible for interface and are of little practical interest.
‘Inputs’ menu contains the following options:
Length. Timeframe. The default is set to 20 candles. Reducing this parameter increases the number of fake alarms, so it should be kept without any modifications.
Source. It displays data from candles. You can change without any fears since the data types difference slight.
StdDev (standard deviation). By default, this parameter is set to 2. You can and should change this parameter, because its increase shorten the number of incoming signals, thereby increasing their reliability.
Offset. Offset relative to the market. You should not change this parameter.
Note the direct correlation length and standard deviation. Therefore, if you plan to change the length in the up or down, change the deviation in the same direction too. At the same time, the deviation change should be a multiple of 1/10, and the length change should be a multiple of 10.
BB in binary options: Conclusion
Despite its deceptive simplicity, the BB for binary options is one of the most effective tools to improve profitability. However, one should not lay hopes on this indicator and assume it as a universal financial panacea, no matter how powerful and effective it is. The experience, the constant practice of using different market tools, including indicators, the observation and a high level of self-organization are the skills that distinguish successful acting traders from beginners.