Bollinger Bands are an amazing resource in the toolkit of any trader, whether they are looking at equity, foreign exchange, bonds, or commodities. In fact, Bollinger Bands aid in visually representing historical price in relation to current values on any financial instrument
John Bollinger created the indicator in the 1980 for longer time-frames (dailies, weeklies, monthly, and yearly charts), but traders have since applied to all forms of charting.
The way a Bollinger Band works is the same as a standard bell curve, by showing the standard deviation of price. Essentially, the extremities become great indicators of good times to buy and sell an asset, by indicating overbought and oversold conditions, much like an oscillator.
The calculation of a Bollinger Band is simple: first – plot a moving average on your chart (the common one is 20 periods). Next, plot the same moving average both higher and lower than the original, using a number of deviations as a guide (commonly set to 2).
Binary options traders can benefit greatly from this indicator, by using it during times when price is ranging in an asset. What this involves is taking trades close to the top and bottoms in the opposite direction (this is known as mean reversion). Note, however, that Bollinger Bands are a great resource during any trending market, as it shows to traders when price might be gaining or losing momentum. This leads to traders going long and short on an asset.
Please note that Bollinger Bands should be used with other forms of analysis, including sentiment, fundamental, and of course, technical. You can use an oscillator, like a Stochastic, to confirm your entries. Also, simply drawing on your charts can illuminate the price action that is taking place.
Please be careful with any indicators you place on your chart. Don’t be lazy: putting all your trust in an indicator is a surefire way to see your lose your trades.