John Bollinger invented the Bollinger Bands which we now use not only in binary options trading, but other forms of trading as well. This analysis tool is best identified as a road map which highlights price volatility within the marketplace. The bands incorporate three different parts, with the first being a curved line placed in the middle. This line acts as a type of Moving Average. The second and third components are the upper and lower bands. Together, these provide an excellent vantage point for observing asset price movement.
When viewing Bollinger Bands, the upper and lower bands act as a statistical curve that is positioned around the asset price. These lines symbolize a specific boundary. As a matter of fact, the upper and lower bands constitute a standard deviation in relation to a moving average. The concept of standard deviation is an analytic concept made use of to summarize data. When used in trading software, it is most commonly referred to as a bell curve.
The most commonly used settings are (20,2). These numbers indicate that the moving average that is positioned in the center of the band acts as a 20-period MA. Additionally, it indicates that both the upper and lower bands act as a pair of standard deviations apart from the MA.This suggests that the asset price remains between these two bands approximately 96% of the time. Because of this, Bollinger Bands are commonly utilized as indicators in many different markets. They provide the trader with the capability to confirm whether the asset price is near a level of resistance and whether the price is near a level of support.
When trading binary options, note that asset prices near Bollinger Bands are highly likely to halt direction and then move in reverse. Observing this price action is very useful, as the strike price may be found either above or below one of the bands. The strike price could also be found within the center of the band. You essentially need to figure out where the strike price is positioned in connection with the band to correctly calculate the level of expected resistance or support which will occur as time advances.
To correctly interpret the meaning of Bollinger Bands, first look at the shape of the bands. Are they narrow or wide? When the band is narrow, this is because many investors are unsure as to which path to take. Whenever the distance between support and resistance diminishes, the bands will become narrow. Next, determine the direction of movement. The bands can move sideways, upward, or downward. Sideways movement indicates a flat market. Upward or downward trends are indicated by upward or downward movement.
Lastly, determine the placement of the asset price. The price, which will be shown in the form of candles or bars, are commonly located to the right side of the band. If a number of candlesticks are positioned on either the upper or lower band, consider this an indicator that the market is in flux and unsure of its next direction. In this case, you can wait for more defined movement before making a decision on your next binary options trade.