Strategy for trading binary options called Double Bolli

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Double Bolli – strategy for trading binary options

One of the key tasks of traders’ daily job is to analyze trends. It is extremely crucial for profitable trading to find answers for such questions as ‘Will the trend continue, and how fast?’; ‘What is the depth of a possible retracement?’; ‘What are potential reversal points?’. Traders spend hours in order to catch a strong trend, using different methods and techniques and trying to identify best entry points. One of the most effective instruments to trade in both trend and sideways range conditions is Bollinger Bands. Multi-functional advantages made this tool so popular among binary options traders. This indicator shows not only a trend’s continuation and reversal, but also it indicates periods of larger volatility which gives a lot of information for an analyst in the decision-making process. However, as many technical lagging indicators, BB has fake signals sometimes and that disadvantage lowers the trading system’s efficiency.

This article will show you several tricks on how to use Double Bolli method in trading practice and how to avoid fake trading alerts, squeezing the blood from the stone and taking maximum information from this instrument. We will use two BB indicators at the same time, changing default settings and having an additional trading signal compared to the standard use of it which is described many times. First of all, we need to choose an asset to trade on and EUR/USD would fit all of the requirements for technical analysis. Secondly, the timeframe choice is also important and 5 minutes chart would be a compromise between super-fast profits and patience.

Strategy description

John Bollinger was a smart guy to invent his indicator, however, we would offer some updates here. The default period of the tool is usually equal to 20 candles. Although, we prefer using 21 as the period just because this number is in the Fibonacci row. The standard deviation is traditionally 2 but we will use a combination of two BB indicators with deviations 2 (default) and 1 (shorter). One more useful tip to improve the graphical comprehension is to change colour for the second BB indicator (the shorter one).

So, we open the Finmax trading platform, switch to advanced charts tool, set the timeframe to 5 minutes and add indicators with changed settings as described above. We will get the following picture:

Although this trading technique could be used in several market conditions, we will take an example of the by-trend strategy, when the price is going in one direction distinctly. The main target of our search is to identify the best entry point when the price pulls back from a recent top, reverses and goes in the same way as before, breaking the previous top/bottom. Traditional Bollinger Bands method suggests a pullback to the medium line before entering the market, however, the market is not so kind sometimes and it does not give a trader such a gift. So we will consider an earlier entry just not to miss a sharp price action.

Trading on a higher price action

We need to detect the following pattern before buying a call option:

в—Џ The price breaks through the upper range of the traditional BB (deviation 2, blue colour).

в—Џ A downside pullback occurs and the close price of the candle does not cross the upper line of the second BB range (deviation 1, yellow colour) from above.

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Here is the screenshot of such a pattern:

Trading on a lower price action

We will be looking for the following pattern before buying a put option:

в—Џ В The price breaks through the lower range of the traditional BB (deviation 2, blue colour).

в—Џ В An upside pullback occurs and the close price of the candle does not cross the lower line of the second BB range (deviation 1, yellow colour) from below.

The bearish example will look like this:

Strategy recommendations

As you can see from the examples above, the method works effectively in periods of a strong trend. Moreover, profitable deals are not restricted with just one candle after the signal occurs. Traders can keep buying options in the same direction several times until the opposite signal would happen. This feature allows traders to have a series of profitable deals in a row. Once you started opening deals, you should switch your attention to the upper/lower range of the standard BB indicator with deviation 2 and monitor the price approaching the extreme line. The one-way action has to be considered as finished when the current price bounces off the higher line for rising price and lower range for declining movement.

Finmax offers high payouts, education, analytical materials as well as traders support. Join Finmax community and get instant benefits by registering on our website. Our team will contact you shortly in order to help you in optimizing the trading strategy according to your goals. Start your profitable binary options trader career now!

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

Binary Options Trading Basics: A Simple tactics as 1-2-3

This strategy in the world of binary options is considered to be one of the oldest. It was used successfully even before the advent of binary options. It was used for many years by many traders. This strategy is based on determining the moment of the trend reversal. In other words, this strategy tracks the moment when the trend is going to change its direction. This strategy works with a long-term, medium and short trend.

In the case of tracking the reversal of the uptrend, we will analyze the low highs.

In the case of tracking the reversal of the downtrend, we will monitor the high lows.

On the chart, we will use 3 points. Hence the name of the strategy.

As an example, we can use the situation when the trend is upward. As we have noted before, this strategy includes 3 points. Let’s analyze with you what point is responsible for what.

  • At the “1” point, we must note the maximum that the uptrend reaches and starts its course in the opposite direction.
  • At point “2” we note the achievement of a minimum price for the rebound and its growth to the maximum.
  • At point “3” we fix the lower maximum, but this is when the price does not return to that same maximum at the point “1”.

Now, marking the points we need on the chart, we will expect a signal for committing to trading. Now we will not need to miss the moment when the price falls below the “2” point. This will be the end of our figure.

This strategy is perfect for novice traders, as it is quite simple to use and does not require special skills. Another plus is the ability to combine this strategy with other tactics, trading tools for both novice traders and professionals. Use it with trend strategies or with those that involve levels of support and resistance.

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.

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