Bollinger Bands – Video Tutorial

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Bollinger Bands, its trading strategy and examples explained

What is Bollinger Band?

Bollinger Bands, one of the most popular indicators, is an envelop around stock price indicating price range of the stock based on stock volatility. When price moves towards upper band it is often considered as overbought and when it is near lower range it is considered as oversold.

Who created Bollinger Band ? John Bollinger a noted technical analyst invented Bollinger Bands. His finding was influenced by J.M. Hurst’s who came with notion of trading envelop around stocks.

What are the components of Bollinger band? Bollinger band has three important dynamic lines
1. Middle Bollinger Band – This is a plot of 20 period simple moving average.
2. Lower Bollinger Band – Middle band – 2 * 20 period standard Deviation.
3. Upper Bollinger Band – Middle band + 2 * 20 period standard Deviation.

Concept of Bollinger Band

Bollinger Band indicates volatility around price of a stock. When price reaches upper band it is considered as overbought and could be a good exit point and when stock approaches lower band it is considered as good entry point. These are highs/lows or support and resistance. When stock has high price fluctuation the band expands and when volatility is low they contract to adjust with change in price volatility.
In normal distribution, 68% of the time price should be within one standard deviation and 95% of the time it should be within two standard deviation.

a. They provide excellent support and resistance in sideways market . To identify sideways market look for stocks where 50/100 DMA is flat (parallel to date axis). b. They can be used for to determine trend reversal. When stock breaks upper band and stay above it for few trading sessions then it is considered to be bullish and when stock breaks lower band ans stays below for some trading sessions bearish signal is generated. c. In strong bullish cycle when stock is moving along with upper band and then moves towards middle band it can be considered as bullish trend reversal. In the same way when stock is moving lower band and then moves towards middle bearish trend reversal can be detected. d. They gives very good idea of volatility of the stock. The wider the band the more volatility it has. e. A very narrowing band means indecision on price movement and a possible break out is imminent. Breakout of Bollinger Band 1. When the price break upper Bollinger band and both upper & lower band is expanding then probability of further up movement is high. If both bands are expanding fast means trend reversal has happened. If the price breaks below lower band and both upper & lower is expanding then chances are that it will further go down. 2. When price break upper band and and both bands are not expanding means false signal of break out. 3. When bands starts contracting after a trend means momentum in trend is loosing.

Our Website provides free Stock Screening Reports on Support/Resistance By Bollinger Bands at: Stock Broke Support Stocks Nearing Support Stocks Nearing Resistance Stock Broke Resistance Limitation a.They alone do not provide absolute buy and sell signal.

b. In strong trending market, Bollinger bands looses its significance. They tend to give many wrong signals. Its best to avoid they in such situations. c. In actual scenario, Price break above Bollinger band is far more than 95% (as per normal distribution) and not all break gives signal of trend reversals. d. They often need support of another technical indicator to determine action.
Color Convention of Bollinger Band and TopStockResearch
1. Dashed grey lines which represents bollinger band.
2. Black lines represent price.

Caution for new Traders

Bollinger bands are dynamic and they move depending on volatility. So the support/resistance to may not be valid on any other day. That is why it is said it provides relative highs and lows or support/resistance.

BOLLINGER BANDS INDICATOR

Bollinger bands is another popular and simple to understand trading indicator. Bollinger bands help define price relative trading channel and will alert trader in moments of price divergence or increased volatility. Learn how to use Bollinger bands indicator for binary options trading.

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Bollinger Bands Explained

Bollinger Bands Indicator is probably the most used indicator for binary options trading by beginners. The indicator provides the information on the relative high and low prices of the traded asset.

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It also gives the information about the market volatility. When the bands are close together it implies that the market has the low volatility, and when the bands are wide it implies that the market is more volatile. Beginners strategy of using the bollinger bands is usually to trade reversals on price breakouts out of the bands zone. However, when trends occur the price has the tendency to ‘climb’ the bollinger band and if consecutive reversals are traded this type of trading can result in many bad trades.

How to Trade Binary Options with Bollinger Bands Indicator

To be able to efficiently trade binary options it is advised is to combine this indicator with Stochastic Oscillator which gives another type of information about overbought and oversold market conditions. To get the precise trade entry points Fibonacci Indicator or predefined Support and Resistance Levels can be used.

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Bollinger Bands Explained – Formula And Indicator Tutorial

Bollinger Bands and binary options form a great combination that makes trading the financial markets simple, quick, and effective. Bollinger Bands provide a deep yet simple-to-understand look into the market’s soul; binary options are the ideal tool to trade the predictions that this look creates.

In this article, you will learn:

  • What Are Bollinger Bands?
  • Why Do Bollinger Bands Work?
  • Why Should Traders Use Bollinger Bands?

With this knowledge, you will immediately be able to trade binary options based on Bollinger Bands.

What Are Bollinger Bands?

Bollinger Bands are a technical indicator. They predict future market movements solely based on past market data, which they aggregate and calculate. The result is drawn directly into your price chart.

The indicator creates three lines, which are commonly referred to as “bands“:

  1. A middle line. This is the main line. It is a moving average, commonly based on 20 periods.
  2. An upper line. This line is the result of the moving average plus the standard deviation multiplied by a factor, commonly two.
  3. A lower line. This line is the result of the moving average minus the standard deviation multiplied by a factor, commonly two.

These three lines predict the range in which the market is likely to move.

  • The upper line is the upper end of the predicted range. It works as a strong resistance.
  • The lower line is the lower end of the predicted range. It works as a strong support.
  • The middle line is an additional barrier. It works as a resistance when the market is trading above it, and as a support when the market is trading below it.

In real-life trading, Bollinger lines predict three things:

  1. The market will remain inside the two outer lines.
  2. When the market approaches the middle line, it will slow down, but can eventually break through it. It can also turn around.
  3. When the market is moving between two lines, it will continue its movement until it reaches the next line.

All of these predictions are tradable, and binary options make trading them easier and more profitable than most other assets.

Why Do Bollinger Bands Work?

To understand the idea behind Bollinger bands, consider these examples:

  • If an apple was priced at £1 for a while and suddenly became more expensive, for example £1.20, fewer people would buy it. This drop in demand would bring the price back to £1.
  • If an apple was priced at £1 for a while and suddenly became cheap, many people would start buying apples instead of other fruit. This surge in demand would bring the price back to £1.

Now, these examples do not say that the price of an apple will never change. It can change – slowly and over time. Rapid price changes, however, are short-term fluctuations. Unless there is a catastrophic event, market psychology requires price changes to take some time.

Bollinger Bands reflect this assumption. The moving average that creates the middle line is the long term price change. The upper and the lower lines create the price channel in which the price can fluctuate.

  • When the market approaches the upper band, you know that traders will soon think, “This asset is getting too expensive.” Demand will drop, and prices will fall back closer to the middle line.
  • When the market approaches the lower band, you know that traders will soon think, “This asset is really I should buy it.” Demand will surge, and prices will climb back closer to the middle line.

In short, this technical indicator helps you to understand market psychology without having to talk to every trader out there. This understanding helps you to make better investments with a quick, simple look at your price chart.

Why Should Traders Use These Bands?

Bollinger Bands can be a great help for binary options traders. They can do three things for them:

  1. Find new trading opportunities. When the market approaches a Bollinger band, you know that the market is likely to turn around. This knowledge alone is enough to win a binary option.
  2. Make more money with your strategy. Bollinger bands provide a clear indication for how far the market can move. Binary options types with high payouts such as ladder options or one touch options require this prediction, which is Bollinger Bands can turn an ordinary strategy into a highly profitable one.
  3. Help you avoid bad trades. Bollinger bands form important resistance and support levels. Even if you decide to not directly trade Bollinger Bands, you should at least be aware of these levels. Otherwise, you might be surprised when the market does something unexpected, and you lose a trade you believed to be a sure winner.

In addition to these three reasons, there is another aspect that makes Bollinger Bands so attractive – they are simple. All you have to do to interpret Bollinger Bands is take a quick look at your price chart. There is almost no chance to get it wrong, and you can finish the entire analysis in a few seconds. Traders who analyze many charts simultaneously love Bollinger Bands because they provide such clear predictions in such a simple way.

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Conclusion

Bollinger Bands are a great tool for binary options traders. At a glance, they provide a deep look into the thought process of all traders and the psychological processes that drive the market. This knowledge can help you find new trading opportunities, make better trades, and avoid bad trades. Any trader can profit from adding Bollinger Bands to their chart, even if they are only using them indirectly to better understand the market.

Traders can also base their entire trading strategies on Bollinger Bands. Our strategy pages include 3 Bollinger Band strategies

If you like binary options, Bollinger Bands will help you to trade better. If you like Bollinger Bands, binary options provide you with a great tool to trade their predictions.

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