The Bollinger Bands are one of the most famous and used technical analysis indicators in trading and are also more than suitable for use on the Forex market.
Developed by technical analyst John Bollinger, the Bollinger Bands graphically show the volatility of the price of a financial asset in an intuitive way and provide important graphical references for establishing market entry and exit levels.
How Bollinger Bands are calculated
To build the Bollinger bands we start from the 21-period simple moving average to which two further lines are added (one upper and one lower) by respectively adding and subtracting the double value of the standard deviation.
In this way, graphically a sort of "channel" is created, the width of which depends on the volatility of the stock and within which prices tend to move.
From an operational point of view, the signal to consider on the Bollinger bands is given by situations in which the price chart touches or even pierces the upward or downward band: the price will therefore tend to return within the bands a breach to the upside represents a bearish signal while a breach to the downside provides an indication of long entry.
Obviously the bands are forming with the price trend and therefore it is good to consider the general trend in evaluating the signal given by the Bollinger bands which could be for a short-term retracement rather than a real trend reversal.
Bollinger Bands and Binary Options
Due to their graphic immediacy and the type of signal they offer with well-defined dynamic levels that are difficult for prices to violate for a long time, Bollinger bands are often used as the basis of trading in binary options in which it is assumed that they keep prices trapped. We then proceed with the purchase of a call or put option depending on the case in order to collect the premium with a fair percentage of success in our favour.
However, this options trading strategy is a little too simplistic to be really effective and, as with spot price trading, it would be useful to validate the signals given by this indicator with others and start from a solid analysis of the underlying before opening positions on the binary options market.
