Point strategy for binary options trading (Bollinger Bands)

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Bollinger Bands Trading Strategies to Use for Digital Options

Bollinger Bands are a popular and useful tool, but they can confuse you as a trader if applied incorrectly. Read on to learn everything you need to know about how to use this strategy to your trading advantage!

A Sword That Cuts Both Ways

Have you ever heard the saying about a sword that cuts both ways? It can be applied to a lot of different things, but it is basically applied to anything that is intended to do one thing while risking the opposite effect.

When it comes to Bollinger Bands, I think it appropriate to caution traders to take it slow; don’t get too far ahead of yourselves, but focus on one use of the tool at a time, get accustomed to it, and relax. The problem with Bollinger Bands is that there are a wide range of uses and trading techniques it can be applied to, and that range makes it very easy to get mixed and/or conflicting signals. This is a quick look at three (3) basic applications of Bollinger Bands trading techniques useful for short term traders using digital options on the IQ Option platform.

Digital Options are a ladder style option with expiry every 5 minutes. Traders can choose in the money, at the money, or out of the money strikes to suit risk preferences.

Support and Resistance

Bollinger Bands are great tools for finding and confirming support and resistance. The best thing about them is that they provide a dynamic support and resistance, once that changes as the market changes. When the market is calm, the lines move closer together because prices are hovering near a point of equilibrium between buyers and sellers. When the market is active, the lines move farther apart because prices are volatile and support/resistance zones are shifting. Volatility is an undeniable part of trading, so it’s important to know how to read it.

Regardless of their width, bollinger bands can be used as targets for entries and exits. Like most tools, these indications are best when used in some type of trend-following manner. If prices are trending higher, touches to the lower boundary and to the mid line can be used as trend following support entries. Meanwhile, if they are trending lower, touches to the upper boundary and the mid line can be used as trend following resistance entries.

Multiple Time Frame Analysis

Multiple time frame analysis is the power behind the Stochastic Power Play technique I described a few weeks ago. It uses a longer time frame to determine trend and a shorter time frame to get signals. Bollinger Bands work well in any time frame and are well suited to this type of analysis. Use a Bollinger Band on a daily chart to get entries on an hourly chart, or use and hourly chart to get signals on a 10, 5, or 1 minute chart. If, on the longer time frame chart, the price is bouncing up from the lower signal line, or up from the mid line, then look for bullish entries on the lower time frame. If, on the longer time frame, the price is moving down from the upper signal line, or down from the mid line, then look for bearish entries on the shorter term chart. Digital Options traders may want to use a 30 minute or 1 one hour chart for trend and major support resistance then move down to 5 minute or 1 minute charts for signals.

Signal Line Breaks

Bollinger Bands are best thought of as trading ranges — dynamic highly elastic trading ranges — that give signals in the same manner. When prices are ranging or range bound, they will move up from support and down from resistance as in the first technique I described in this post. If, however, prices break through a signal line they can give a much stronger signal. The caveat is that it must be a firm break of the signal line because you don’t want to confuse it with a test of resistance.

A break of the line, either the top or bottom or the mid line, is an indication of changing market sentiment and constitutes a break out. Prices can be expected to continue on in the direction of the break out, or if they fall back from that point to retest the point of break for support/resistance. The mid line does count in this technique as it will often provide support/resistance as well. A break to the upside is bullish, especially if found within an up trending market, a break to the downside is bearish and strong when found in a down trending market. This one hour chart shows a number of bullish, trend following line breaks that all result in at least one more candle of further upside.

Have you traded with Bollinger Bands? If not, try starting out with one of the techniques mentioned above. Use your demo account to get a feel for it, and apply it to your next trade when you’re ready. As always, we wish you a pleasant trading experience!

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

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The Bollinger Bands Trading Strategy Guide

Last Updated on March 30, 2020

Here’s the thing:

Many new traders think they need more indicators to be a consistently profitable trader.

But the truth is…

It doesn’t work that way.

The price is above the 20 period MA but RSI is showing the market is overbought.

At the same time, the ADX indicator is at 25 which shows a non-trending market.

So, which do you follow?

Now you’re stuck, right?

Well, the good news is…

Bollinger Bands can help you overcome this issue — and much more.

That’s why I’ve created this Bollinger Bands trading strategy guide to show you how useful this indicator is and what it can do for your trading.

Or if you prefer, you can watch this training video below…

Bollinger Bands explained: What is it and how does it work?

Bollinger Bands is a trading indicator (which consist of 3 lines) created by John Bollinger.

It can help you:

  1. Identify potential overbought/oversold areas
  2. Identify the volatility of the markets

Now you’re probably wondering:

“What do the 3 lines mean?”

Upper band – Middle band plus 2 standard deviation

Lower band – Middle band minus 2 standard deviation

Middle band – 20-period Moving Average

Note: I’ve used the default settings for Bollinger Bands which is 20-period moving average and 2 standard deviations for the upper and lower bands.

So, what is standard deviation?

Well, it basically measures how far you’re away from the average.

If you want to learn more, go study this lesson on standard deviation.

So in other words…

If the price is near the upper Bollinger Band, it’s considered “expensive” because it is 2 standard deviation above the average (the 20-period moving average).

And if the is price near the lower Bollinger Band, it’s considered “cheap” because it’s 2 standard deviation below the average.

Here’s an example:

Do not make this MISTAKE when trading Bollinger Bands

Just because the price seems “cheap” or “expensive” doesn’t mean you enter a trade immediately.

Because in trending markets, the market can remain “cheap” or “expensive” for a long period of time.

Here’s an example: EUR/USD remained “expensive” for many months…

As you can see, it’s a painful thing to do if you blindly shorted when the price is at the upper bands.

So what should you do?

Bollinger Bands trading strategy: How to buy low and sell high

You’ve probably heard this a gazillion times.

If you want to make money in the markets, just buy low and sell high.

But the question is… HOW?

Well, you can do so with Bollinger Bands (duh).

The outer Bollinger Bands are 2 standard deviations away from the mean.

This means if the price is in the lower band, it’s considered “cheap”. And if it’s in the upper band, it’s considered “expensive”.

But before you think…

“Great! I’ll just go long when the price reaches the lower band.”

Not so fast my young Padawan.

If you want to have a higher probability of success, then you’ll need a few confluence factors coming together before you trade the bands.

  • Look to long the lower band in an uptrend (and vice versa)
  • Reversal candlestick patterns that show signs of reversal
  • The outer bands coincide with Support and Resistance

Here’s an example:

The price on EUR/USD is at the lower Bollinger Band that coincides with Support, and it formed Bullish Engulfing pattern.

Pro Tip: You can adjust your Bollinger Bands settings to 3 standard deviation (or higher) to identify even more overbought/oversold levels to trade off.

Moving on…

Bollinger Bands Squeeze: How to identify explosive breakout trades about to occur

Volatility is always changing.

The markets move from a period of high volatility to low volatility (and vice versa).

If you’re a new trader, it can be difficult to identify the volatility of the markets.

So, this is where Bollinger Bands can help because it contracts when volatility is low and expands when volatility is high.

Here’s an example:

So, the question is…

How do you use Bollinger Bands to anticipate a possible breakout?

You look for the Bollinger Bands to contract (or squeeze) because it tells you the market is in a low volatility environment.

Because volatility tends to expand after contraction!

An example: Before the breakdown, Crude Oil is in a low volatility environment (as shown by the contraction of the bands).

Pro Tip: The longer the volatility contraction, the stronger the subsequent breakout will be.

How to identify the direction of the breakout

Although Bollinger Bands can alert you to potential breakout trades, it doesn’t tell you the direction of the breakout.

However, you don’t need to be Einstein to figure out where the market is likely to go.

Because all you need to do is look at the trend.

Look at the chart below:

Where do you think the market is likely to breakout, higher or lower?

Probably lower because the trend is down.

And you’re right because the market broke down lower (yes I cherry-picked this chart)…

Simple yet powerful, right?

How to trade with the trend using Bollinger bands

You know the middle line of the Bollinger Bands is simply a 20-period moving average (otherwise known as the mean of the Bollinger Bands).

And in strong trending markets, the 20-period moving average can act as an “area of value”.

This means when the market pullback towards the 20 MA, it’s an opportunity for you to get long (or short).

An example: The price bouncing off the 20-period moving average and it offers shorting opportunities…

Here’s another example:

Pro Tip: If you want to ride the trend, you can trail your stop-loss using the 20 MA, or the outer Bollinger Bands.

The Bollinger Bands and RSI Combo (a little-known technique)

Here’s the thing:

The Bollinger Bands indicator is great for identifying areas of value on your chart.

But the problem is… it doesn’t tell you the strength or weakness behind the move.

For example: How do you tell if the market will continue to trade outside of the outer bands or mean revert?

And what you’re looking for is a divergence on the RSI indicator.

You’re probably wondering:

“What is an RSI divergence?”

Well, it can go 2 ways…

  1. A bearish divergence is when the market makes a higher high, but the RSI indicator shows a lower high (a sign of weakness)
  2. A bullish divergence means is when the market makes a lower low, but the RSI indicator shows a higher low (a sign of strength)

So, now the question is…

“How do you combine RSI divergence with Bollinger Bands?”

If the price is at upper Bollinger Bands, then you can look for a bearish RSI divergence to indicate weakness in the underlying move.

If the price is at lower Bollinger Bands, then you can look for bullish RSI divergence to indicate strength in the underlying move.

Here’s an example:

Pro Tip: You can combine this technique with Support and Resistance to find high probability reversal trades.

The Rubber Band effect: How to use Bollinger Bands and “predict” market reversal

You can think of Bollinger Bands like a rubber band.

Whenever the price gets too far away from it, it tends to mean revert back towards the middle band.

You’re probably thinking…

“But how do you know when it’s about to snap back? Because the price can stay overstretched for a long time.”

You’re absolutely right.

That’s why you must also take into consideration Bollinger Bands, Support Resistance, and Candlestick patterns.

Here’s how it works…

(For long setups)

  1. Look for strong momentum into Support
  2. You want to see the candle close outside the lower Bollinger Bands (this tells you the market is overstretched)
  3. If the next candle is a bullish reversal pattern (like Hammer, Bullish Engulfing, etc.), then the market is likely to reverse higher
  4. And vice versa for short setups

Here’s what I mean…

Price bounced from Support at EUR/CHF Daily:

Price bounced from Support at Brent Crude Oil Weekly:

Pro Tip:

By default, the outer bands are 2 standard deviations away from the middle band (20MA).

If you want to identify even more overstretch market conditions, you can increase the standard deviation to 3 or more.

Frequently asked questions

#1: Hey Rayner, what timeframe does the Bollinger Bands work best on?

There’s really no best timeframe out there to use the Bollinger Bands as the concepts I’ve shared can be applied across different timeframes.

So it depends on your trading style and approach:

  • If you’re a day trader, then you’ll use the Bollinger Bands on the lower timeframe like the 15-minutes or 5-minutes timeframe.
  • If you’re a swing or position trader, then you’ll use the Bollinger Bands on the daily or the weekly timeframe.

#2: Is there any difference between the accumulation stage of a market and a Bollinger Bands squeeze?

Yes, there are differences. An accumulation stage is a range market within a downtrend, where you can identify resistance and support as price swings up and down within the accumulation.

Whereas in a Bollinger Bands squeeze, the market doesn’t swing up and down because the price action gets really tight and the candles are overlapping one another. So it’s impossible to identify support and resistance in a Bollinger Bands squeeze.

#3: Is it better to use Bollinger Bands to trade breakout or to trade market reversals?

It can similarly serve for both breakout and reversal trades.

You can look to trade breakouts after a Bollinger Bands squeeze.

Or you can also use it to trade market reversals after the Bollinger Bands expand, which shows the increase in volatility of the market. If the price comes to a key market structure like support resistance and then forms a price rejection, that’s a possible opportunity for you to take a reversal trade.

Conclusion

Here’s what you’ve learned today:

  • The Bollinger Bands indicator can help you identify when the market is “cheap” or “expensive”
  • In an uptrend, you can long near the lower Bollinger Band
  • In a downtrend, you can short near the upper Bollinger Band
  • When the Bollinger Bands is in a squeeze, it signals the market is “ready” to breakout
  • You can use the 20-period moving average to time your entries in trending market
  • You can use Bollinger Bands and RSI divergence to find high probability reversal trades
  • You can use Bollinger Bands and Support and Resistance to “predict” market reversal

Now, here’s what I would like to know…

How do you use the Bollinger Bands trading indicator?

Let me know your thoughts in the comments section below.

Trading strategy on Bollinger bands

The previous strategies that I described were based on stochastics, relative strength index (RSI) and moving averages. Today I will show the use of another popular indicator, also popular in Forex – Bollinger bands. Bollinger bands for binary options are convenient because they allow you to trade not only with classic options, but also to try their hand at such kinds of contracts, as Range and One Touch. In addition, this indicator gives a fairly accurate signals for entry, which hardly needs proving supporting additional indicators.

Bollinger bands for binary options

Bollinger bands for binary options — technical analysis tool, which allows to estimate the location of the price relatively to normal shopping corridor. Represents the upper and lower limits around the moving average. Signal is output of the prices beyond the retail corridor (the break of the upper or lower range limits). The indicator also signals about market volatility, showing how much the price is too high or too low in comparison with moving average (shows the deviation from the schedule).

The Bollinger bands show the range in which ranges the price chart. The price reaches the upper boundary, repels from it, goes to the bottom. The essence of the strategy is relatively simple: if the price is approaching the range limits, you can expect a reversal. In the figure, the pivot points marked with ovals.

The advantages of such trade are obvious — the indicator is suitable for any timeframes, but there are limitations: since the strength of the trend is not clear, the strategy applies only for short-term scalping strategies. In other words, the period of expiration is not more than the 1st candle.

The conditions for opening a buy trade:

  • current candle opened within the range of Bollinger bands;
  • andle crossed the lower boundary of the top-down;
  • candle has closed below the lower boundary of the Bollinger band.

Conditions for opening sell trade:

  • current candle opened in the range limit, but its growth certainly suggests that the candle will cross the border of the upper range;
  • current candle closes above the upper band of the Bollinger band.

Important: the figures show the range from the basic parameters of the indicator (default). However, for different assets, the percentage of false signals can profit more or less. That’s why experienced traders set the skew parameter of “2” or “3”. Bollinger bands for binary options get wider, the price rarely reaches the edge of the range. On the one hand, this increases the likelihood of a successful transaction, on the other hand – good signals appear less frequently. The need for setting the deviation for each underlying asset is determined empirically.

There is also a strategy in which a trader opens a position in advance, when the candle not yet reached the end of the range. When approaching the upper boundary, – option for a fall is purchased. Strategy only works on short timeframes or on the flat.

As it can be seen from the figure, only 2 signals have made a loss, while 10 made a profit. The following is a practical example on IQ Option broker trading terminal. Bollinger bands for binary options can be used in conjunction with other indicators that show the strength of the trend. This will increase the number of entry signals weeding out false ones.

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