One of the technical tools found on virtually every platform are Bollinger Bands. These bands are plotted based on a moving average that can be adjusted and applied on any timeframe. The bands are the standard deviation from that moving average, and on most if not all platforms, the standard deviation amount can be adjusted as well.
Different traders will have various styles of reading and utilizing these bands – some see them as support and resistance, while some traders use them to show volatility and other traders may use them for targets.
For the purposes of today’s article, we will look at the latter view, and use Bollinger Bands as a tool to help select price targets. The hourly chart of the EUR/USD currency pair below has been plotted with a 20-period moving average with Bollinger Bands at the first, second, and third standard deviations.
When a market is very quiet and sideways, the first and possibly second deviations usually contain a market. You should not consider these deviations as support or resistance in themselves, but rather signs of how extended a market move may be.
However, when a market has a strong trend, it often may maintain that overall trend until price has touched the third deviation. Take for example this chart, which shows arrows pointing to every touch of the outermost band, which is the third deviation.
Currently the EUR/USD is trading at about 1.0744, and the hourly bars are showing a downtrend taking place. A trader using these bands may find the lower third deviation as a suitable target, which currently projects at about 1.0716, 28 pips below the current market.
Traders looking for a very low risk way to target this band may wish to utilize binary options, which present a limited-risk, defined-reward alternative to traditional forex trading. The yes/no proposition gives you an exact idea of where you need price to be and at what time.
The time is 7:21 am EST; and looking at the 11:00 am EST expiring strikes, there is an option at 1.0720, which is four pips above the third deviation target. Because of the $100 base value of these options, figuring the risk versus reward is very simple.
When you buy an option, you want the market to settle above the strike price. Your risk would be the purchase amount while the potential reward would be the difference between the risk and the $100 value.
However, when you sell an option, you want price to settle below the strike, and your potential profit would be the selling price, while the risk would be the difference between that sell price and the $100 value.
In this case, you could sell the 1.0720 strike for $82.50. This means that if price settles around that third deviation (anywhere below 1.0720) at expiration, you could earn $82.50 while only risking $17.50. Or once price reaches the the third deviation you could close this trade early taking a partial profit while removing any remaining risk.
The purpose of this article is not to endorse a specific strategy or market view but to illustrate the usefulness of these binary options. If your view is bullish then there are many higher strikes available to be purchased; or if you simply want to take the opposite side of this trade, all you would need to do it buy this option which now would be $87.75, to earn $12.25 or you could wait until this option has a lower price and then buy it with a better risk vs reward.
Binary trading offers many traders an ideal alternative to the traditional markets without having to trade on margin, leverage or have to take on large amounts of risk.
Note: Exchange fees not included in calculations.