# Bollinger Bands ® and Their Use in Binary Options

By | July 14, 2013

Sunday, July 14th, 2013 by James Franklen

Bollinger Bands ®  are the technical indicators, used to derive the additional information about the price of an asset. This is done by the mathematical operation of the price information, displayed on a charting platform. In simple words, Bollinger Bands are used to measure the market volatility. The Concept: The basic concept behind Bollinger Bands is the use of moving average and standard deviation.  Standard deviation is the mathematical algorithm, here used to measure the market volatility. Construction: Bollinger Bands consist of two bands, one above and other below, with a central line passing through them. These upper and lower bands are the standard deviation of the underlying asset. The central line is the exponential moving average.

The Working: The bands, also known as price channels, move apart or come close in high and low volatile situations. So basically, Bollinger Bands adjust themselves with the movement of price of securities. Computation: The computation of values in Bollinger Band is pretty simple. The first step is to plot the moving average. Bollinger Bands take 20 period moving averages for this purpose. The next step is to plot out the moving average above and below the initial average. This is done by using number deviations. Use in Binary Options: In binary options, Bollinger Bands can be used to analyze a broad range of securities. The traders can use Bollinger Bands as part of their trading strategy because they provide the traders best trading opportunities. Bollinger Bands work best with most common types of options, including Range, Touch, and basic up/down. The primary thought, which comes in the mind of binary option traders, is to get an idea about the price movement. The asset’s price tends to stay within the boundaries of the Bollinger Bands. However, sometime the price can cross the upper and lower bands. This situation is termed as “breaching the bands”. This is an indication of reversal of price movement. If the upper band is touched and crossed by the asset’s price, it’s time to go short. This is mainly because the price is expected to revert back to the mean position. If the price touches the lower price channel (lower band) and cross the boundaries, it’s time to go long. The price stays within the bands for almost 95% of the time and breaches the boundaries and stays out for 5% of the time. The best way to trade is to wait for at least two candles to open below or above of the Bollinger Bands. When this situation arises, it’s time to purchase the binary options in hope of reverting back of the prices to the mean (central line) position. If the trade ends in the money and asset continues along its trajectory, place some quick expiry trades to get most out of the situation. Note: Do not use Bollinger Bands as a buy /sell signal. Use Bollinger Bands as a confirmation tool with combination of other tools and indicators. For example, if RSI shows an intense overbought situation, whereas Bollinger Bands squeeze close together, there are great chances of making profit with a short trade. Learn more about Binary Options Trading at the Binaryoptionschannel.com