Any seasoned binary options trader would be well familiar with the technical indicator called Bollinger Band (BB). Bollinger Band was developed using standard deviation and moving average in order to gauge if the price has gone too far from the moving average. The primary logic behind the Bollinger Band was that price tends to come back to the moving average regardless of which way the market was moving.
How to Use the Bollinger Band?
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Traditionally, binary options traders used Bollinger band by plotting two standard deviations from the moving average, one would be positive and one would be negative. These two Bollinger bands would be plotted above and below the given moving average.
When the price reaches the higher band, it would indicate a reversal towards the moving average. By contrast, when the price reaches near the lower Bollinger band, it would indicate that the price would likely to reverse back up to the moving average.
Why Use the 2.5 Standard Deviation?
Applying the traditional Bollinger Band method on longer time frame can work wonders to a binary options trader’s account. However, when using this strategy on a lower time frame like 60 seconds, it is recommended that traders increase the Standard Deviation (SD) variable to 2.5 instead of using 2.0.
Using 2.0 SD would generate too many false signals because price moves very quickly in the 60-second chart. Our research has shown that using any value above 2.5 for the SD would reduce the number of trades significantly and it may only generate less than a few trades per day.
Hence, the optimal SD value for the 20 Moving Average would be around 2.5.
Applying the BB 20 – 2.5 Strategy
As a rule of thumb, binary options traders should enter a PUT order when the price touches the upper Bollinger Band and they should enter a CALL order when the price touches the lower Bollinger Band.
However, once again, we have to emphasize that at No1 Binary Options, we are big fans of the candlestick breakout method.
Hence, instead of blindly entering the market whenever the price touches the upper or lower Bollinger Bands, it is highly recommended that binary options investors consider waiting for the price to break the low or high of the candlestick that touched the Bollinger Bands, prior to placing the order.
As you can see in the example USDCHF 60 Second chart, every time the price reached the upper or lower Bollinger Bands, and price penetrated the low or high of the candlestick that touched the Bollinger Bands, respectively, it continued to move the opposite direction of the established trend.
As the price action is very fast on the 60-second chart, price can sometimes create gaps. When there is a gap, it may be too late to enter the market. Hence, we advise traders to leave trades when there is any gap in the market.
Otherwise, the BB 20-2.5 strategy can be a great tool to earn some quick profits in the binary options market.
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