Bollinger Bands Trading – Binary Options Trade

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Implement the Bandit Strategy with Bollinger Bands

The bandit strategy is one my favorite bollinger band trading strategies. It is a strategy I’ve used for many successful trades in my career as a trader. In this article I will share with you how to anticipate financial market volatility and move ahead of the market using the bandit strategy.

This strategy is custom made for traders who like to take advantage of highly volatile movements in the market. But, before you read any further get yourself mentally ready to steal some amazing trades from the market. The key is to just be patient and wait for the right set-up; it might take some time for the right moment to come along but when it does it’s definitely worth the wait.

This article address some technical terms which will be defined as they are brought up as I outline the bandit strategy. At this moment you might be asking yourself, ‘what is bollinger bands trading?’ So, before we get into the specific details of the bandit strategy, I want to discuss what exactly are bollinger bands and how do you use them for trading.

What is bollinger bands trading?

Bollinger bands are a technical analysis tool developed for trading in the financial markets in the 1980’s. Since then, using a bollinger bands trading strategy has become extremely popular among traders in stocks, bonds, forex, and binary options. The graph measures a relative high or low price of the assets in comparison to previous trades of a unique asset. The prices are represented in bands which are generally a moving average of the previous trades. The default moving average is 20 days. A bollinger bands trading relies on this analytical view to determine if the underlying asset is overbought or oversold.

When is the right moment to trade?

To determine if it is the right moment to make your move, all you need to do is analyze the bollinger bands according to the following:

  1. Deviation 2.0; period 20
  2. Deviation 3.0; period 20

In basic terms, wait for a highly volatile market movement in which there is a significant increase or decreases in the slope of bullish or bearish trend respectively. The trend should cross 3 standard deviations of the bollinger band as shown in the chart below.

In the above chart that are two examples of when the trend line crosses the bollinger band along the 3rd standard deviation. 1) Buy Example for an intraday trade – a trade that takes place during the day. 2) Sell Example where the daily candle is closed. (The daily candle closes everyday at 5pm EST in the United States. Therefore, if you are trading in London, for example, the daily candle will close out at 10pm. Everybody around the world sees the same data, however, the time is relative to your location around the globe.)

How to set up the trade:

When the candle crosses the bollinger bands at the 3rd standard deviation, or even better if candle closed above 3rd the standard deviation place 2 positions:

  1. Major trade:
    1. Investment level: significant amount
    2. Trade type: touch
  2. Minor trade:
    1. Investment level: smaller amount
    2. Trade type: touch

To reiterate the ideal position, your best odds for a successful trade exist when the close price of the candle is above or below at the 3rd standard deviation of the bollinger bands.

Limitations:
Make sure the distance from the 3rd standard deviation of the Bollinger bands to the 20 day moving average is at least 80 pips. (A ‘pip’ is the smallest price change a given exchange can make. Most currency pairs are priced to four decimal places. So the smallest price change is on that last decimal place.)

Time frames:
You can take advantage of the bandit strategy across all time frames except for 1 minute. In general, the longer your time frame the greater your chances of expiring in the money. Recommended time frames: Monthly, Weekly, Daily, 4 hours, 1 hour, 15 min.

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Currencies
Recommended currencies for this strategy are: GBP/USD, EUR/USD, AUD/USD, USD/JPY.

Use the above rules to succeed at the bandit strategy, and take advantage of volatile market moves. Once you feel comfortable implementing this strategy you can optimize your timing by searching for the right moment to place your trade. At same time analyze the chart from the highest time frame to the smallest.

Until you have gained a competent level of fluency in the bandit strategy, I suggest you try it out on a demo account, an incentive offered on most platforms. A demo account will allow you to optimize your bollinger band trading skills with real time data without risking your hard earned cash.

Prepare to win some successful trades with this phenomenal strategy.

Bollinger Bands® are a type of chart indicator for technical analysis and have become widely used by traders in many markets, including stocks, futures, and currencies. Created by John Bollinger in the 1980s, the bands offer unique insights into price and volatility. In fact, there are a number of uses for Bollinger Bands®, such as determining overbought and oversold levels, as a trend following tool, and for monitoring for breakouts.

Key Takeaways

  • Bollinger Bands® are a trading tool used to determine entry and exit points for a trade.
  • The bands are often used to determine overbought and oversold conditions.
  • Using only the bands to trade is a risky strategy since the indicator focuses on price and volatility, while ignoring a lot of other relevant information.
  • Bollinger Bands® are a rather simple trading tool, and are incredibly popular with both professional and at-home traders.

Calculation of Bollinger Bands

Bollinger Bands® are composed of three lines. One of the more common calculations uses a 20-day simple moving average (SMA) for the middle band. The upper band is calculated by taking the middle band and adding twice the daily standard deviation to that amount. The lower band is calculated by taking the middle band minus two times the daily standard deviation.

The Bollinger Band® formula consists of the following:

Overbought and Oversold Strategy

A common approach when using Bollinger Bands® is to identify overbought or oversold market conditions. When the price of the asset breaks below the lower band of the Bollinger Bands®, prices have perhaps fallen too much and are due to bounce. On the other hand, when price breaks above the upper band, the market is perhaps overbought and due for a pullback.

Using the bands as overbought/oversold indicators relies on the concept of mean reversion of the price. Mean reversion assumes that, if the price deviates substantially from the mean or average, it eventually reverts back to the mean price.

Bollinger Bands® identify asset prices that have deviated from the mean.

In range-bound markets, mean reversion strategies can work well, as prices travel between the two bands like a bouncing ball. However, Bollinger Bands® don’t always give accurate buy and sell signals. During a strong trend, for example, the trader runs the risk of placing trades on the wrong side of the move because the indicator can flash overbought or oversold signals too soon.

To help remedy this, a trader can look at the overall direction of price and then only take trade signals that align the trader with the trend. For example, if the trend is down, only take short positions when the upper band is tagged. The lower band can still be used as an exit if desired, but a new long position is not opened since that would mean going against the trend.

Create Multiple Bands for Greater Insight

As John Bollinger acknowledged, “tags of the bands are just that, tags, not signals.” A tag (or touch) of the upper Bollinger Band® is not in and of itself a sell signal. A tag of the lower Bollinger Band® is not in and of itself a buy signal. Price often can and does “walk the band.” In those markets, traders who continuously try to “sell the top” or “buy the bottom” are faced with an excruciating series of stop-outs, or even worse, ever-mounting losses as price moves further and further away from the original entry.

Perhaps a more useful way to trade with Bollinger Bands® is to use them to gauge trends.

At the core, Bollinger Bands® measure deviation, which is why the indicator can be very helpful in diagnosing trend. By generating two sets of Bollinger Bands®, one set using the parameter of “one standard deviation” and the other using the typical setting of “two standard deviations,” we can look at price in a whole new way. We will call this Bollinger Band® “bands.”

In the chart below, for example, we see that whenever price holds between the upper Bollinger Bands® +1 SD and +2 SD away from mean, the trend is up; therefore, we can define that channel as the “buy zone.” Conversely, if price channels within Bollinger Bands® –1 SD and –2 SD, it is in the “sell zone.” Finally, if price meanders between +1 SD band and –1 SD band, it is essentially in a neutral state, and we can say that it’s in “no man’s land.”

Bollinger Bands® adapt dynamically to price expanding and contracting as volatility increases and decreases. Therefore, the bands naturally widen and narrow in sync with price action, creating a very accurate trending envelope.

A Tool for Trend Traders and Faders

Having established the basic rules for Bollinger Band® “bands,” we can now demonstrate how this technical tool can be used by both trend traders who seek to exploit momentum and fade-traders who like to profit from trend exhaustion or reversals. Returning to the chart above, we can see how trend traders would position long once price entered the “buy zone.” They would then be able to stay in the trade as the Bollinger Band® “bands” encapsulate most of the price action of the move higher.

As for an exit point, the answer is different for each individual trader, but one reasonable possibility would be to close a long trade if the candle on the candlestick charts turn red and more than 75% of its body were below the “buy zone.” Using the 75% rule, at that point, price clearly falls out of trend, but why insist that the candle be red? The reason for the second condition is to prevent the trend trader from being “wiggled out” of a trend by a quick move to the downside that snaps back to the “buy zone” at the end of the trading period.

Note how, in the following chart, the trader is able to stay with the move for most of the uptrend, exiting only when price starts to consolidate at the top of the new range.

Bollinger Band® “bands” can also be a valuable tool for traders who like to exploit trend exhaustion by helping to identify the turn in price. Note, however, that counter-trend trading requires far larger margins of error, as trends will often make several attempts at continuation before reversing.

In the chart below, we see that a fade-trader using Bollinger Band® “bands” will be able to quickly diagnose the first hint of trend weakness. Having seen prices fall out of the trend channel, the fader may decide to make classic use of Bollinger Bands® by shorting the next tag of the upper Bollinger Band®.

As for the stop-loss points, putting the stop just above the swing high will practically assure the trader is stopped out, as the price will often make many forays at the recent top as buyers try to extend the trend. Instead, it is sometimes wise to measure the width of the “no man’s land” area (distance between +1 and –1 SD) and add it to the upper band. By using the volatility of the market to help set a stop-loss level, the trader avoids getting stopped out and is able to remain in the short trade once the price starts declining.

Bollinger Bands Squeeze Strategy

Another strategy to use with Bollinger Bands® is called a squeeze strategy. A squeeze occurs when the price has been moving aggressively then starts moving sideways in a tight consolidation.

A trader can visually identify when the price of an asset is consolidating because the upper and lower bands get closer together. This means the volatility of the asset has decreased. After a period of consolidation, the price often makes a larger move in either direction, ideally on high volume. Expanding volume on a breakout is a sign that traders are voting with their money that the price will continue to move in the breakout direction.

When the price breaks through the upper or lower band, the trader buys or sells the asset, respectively. A stop-loss order is traditionally placed outside the consolidation on the opposite side of the breakout.

Bollinger vs. Keltner

Bollinger Bands® and Keltner Channels are different, but similar, indicators. Here is a brief look at the differences, so you can decide which one you like better.

Bollinger Bands® use standard deviation of the underlying asset, while Keltner Channels use the average true range (ATR), which is a measure of volatility based on the range of trading in the security. Aside from how the bands/channels are created, the interpretation of these indicators is generally the same.

One technical indicator is not better than the other; it is a personal choice based on which works best for the strategies being employed.

Since Keltner Channels use average true range rather than standard deviation, it is common to see more buy and sell signals generated in Keltner Channels than when using Bollinger Bands®.

The Bottom Line

There are multiple uses for Bollinger Bands®, including using them for overbought and oversold trade signals. Traders can also add multiple bands, which helps highlight the strength of price moves. Another way to use the bands is to look for volatility contractions. These contractions are typically followed by significant price breakouts, ideally on large volume. Bollinger Bands® should not be confused with Keltner Channels. While the two indicators are similar, they are not exactly alike.

Bollinger Bands in Binary Trading

We have been talking about indicators that allow you to monitor price action movement and allow you to make trades based on informative tools. Another indicator that binary option traders employ is the use of Bollinger bands. This indicator requires knowledge in candlesticks and moving averages, both discussed in our previous articles. Now, we will use these knowledge to make use of yet another indicator that has helped many binary options traders.

What are Bollinger Bands?

A Bollinger band is a pair of trend lines plotted in a price chart two standard deviations away from a moving average. These bands consist of a center line and two price channels, or bands, above and below it. The center line is an exponential moving average while the bands are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an asset becomes volatile, when there is an evident expansion of the bands, or becomes bound into a tight trading pattern, as is evident in a contraction of the bands.

Because standard deviation is a measure of volatility, these bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen, or they move further away from the average, and during less volatile periods, the bands contract, or they move closer to the average. The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply.

Using this principle with the help of Bollinger bands makes it one of the most popular technical analysis techniques in binary options trading. The closer the prices move to the upper band, the more inclined binary options traders are to purchase call options, and the closer the prices move to the lower band, the more inclined they are to purchase put options. Volatility allows traders to gather important information on how the market is trading.

The Bollinger Bands were invented in the 1980s by John Bollinger. This famous trader said that volatility was dynamic in nature and not static, and that adaptive methods should be made to track the changes of volatility. According to him, Bollinger bands can show the relationship between the low and high prices of an asset. Techniques based on this indicator use the premise that low prices are found near the lower band while high ones are located at the upper band. Because of this, Bollinger bands are particularly useful in pattern recognition.

How to Make Out Bollinger Bands

One of the most challenging aspects of trading is to determine the trend. In this case, the binary options trader may use certain techniques with the bands to help him determine the trend. Firstly, this setup requires patience and discipline, as the bands will tell us whether the price action is an uptrend or a downtrend. Using candlesticks for this technique is preferred, as one can see the closing price better than any other type of chart.

An understanding of price support and resistance is also critical for determining the entry point. We have resources on the topic, as well as other numerous helpful articles that will help you strategize your trading techniques.

Let us start by looking at the figure below, showing a historical trade closing above the upper Bollinger band.

The first step is to look for a candle that clearly closes above the upper Bollinger band line. For instance, like the figure below, the closing price has closed above the Bollinger band line. The other candles to the left of our focus have not closed above the Bollinger band line. Only their shadows have gone above the line. But the actual candle have closed below the upper Bollinger band line.

This occurring is critical as the part of the first criteria of the trade has been met. Once the binary options trader clearly sees that the green candles closed above the upper band, he must ensure that when this occurred, a new high was also generated. This is evident as we zoom out of the chart.

For example, when the candle closes above the upper band, we also have that price generate a new high. This is critical as this part of the setup defines the direction of the trade. This particular setup shows an uptrend, once these two elements of the trade has been met.

Second step of this strategy is to look for a specific entry point, so you know when to purchase a call. This is where previous price highs and lows comes into play, as these are the points that the binary options trader need to use as reference to execute the trade. When a green candle closes above the band and a new high is generated, we need to wait for the market to retrace back to a previous high.

Finding out the relevant high to use is required before executing the purchase. For example here, the price acted as a magnet and retraced back to the previous price highs, paused, then continued to move higher in the uptrend.

A stop loss, can be tied below the previous high levels.

And, new highs can be targeted in terms of profit points.

Next, let us take a candle that closes below the lower band.

As can be seen, the market is trending down. The focus candle has closed well below the lower band. Furthermore, a new level has also been established, as can be seen with the later lows forming from the previous lows.

Once this criteria has been met, look for an entry point, or a point to enter the trade where the price levels go down. Traders also need to look at previous lows that act as resistance and define the entry. Once the price retraces from the point shown below, we can predict a downtrend in the price levels.

A stop loss is placed above the entry, and new profit targets can be seen in the lows. With this technique we are defining the trend via the Bollinger bands using price levels as a form of entry and exit.

As we look at longer historical trends, we can see that this setup over and over. Shown below are more examples of these trades.

In essence, trading with Bollinger bands can help determine specific trade setups. It is up to the binary options trader to make informed decisions based on this indicator of price movement.

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