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Transcript Learn how to use a Relative Strength Index Indicator (RSI)

Hello, traders. This is binaryoptions.net.au, and today were going to teach you how to trade with the Bollinger bands. But first of all, lets go through what the Bollinger bands are. Bollinger bands consist of a middle band, with two outer bands. The middle band is a simple moving average that usually comes with a 20 period by default. The upper and lower band are usually set to 2 standard deviations above and below the moving average. And remember that standard deviation is a mathematical calculation that measures volatility.

So, this indicator is used as a volatility indicator first. When the bands are contracting, volatility is drying out. This means that when the bands are close to each other, price action is more than likely to be very choppy, and in a narrow range. But when the bands are expanding, volatility is picking up. Meaning that price is actually moving, and we can make money out of those moves. Because, remember guys, that as traders, we profit from big moves in price.

And theres four ways to use the Bollinger bands to trade binary options. The first one is the simple overbought and oversold singles in ranging markets. The second one are reversal trades. The third one is the Bollinger band squeeze. And the fourth one, and most powerful one, is the Bollinger brand squeeze, with a failure to break the previous high, or the previous low.

Now, why dont we go to the charts, and look at some examples of these setups, so you can better visualize what were talking about here. OK guys, so this is the GBP/USD 15 minute chart. And right now were going to go through the first setup that we can find using the Bollinger bands. But first of all, Im going to show you how to plug the Bollinger bands into your charts.

If you are using the MetaTrader 4 platform. as I am, you go to this plus button. This plus button is the button that you click when you want to add an indicator. You click on the plus button, you go to trends, and then you set Bollinger bands. As you can see, the default period is 20 a 20 period for the simple moving average, and the default standard deviations 2. Were going to use this default period and deviation for our Bollinger bands trading.

Now, you just click accept, and there you go. This is what the Bollinger bands look like. I know it looks kind of messy, but once you understand how you trade with them, youre going to see how helpful they are. Now, the first setup that you are going to be looking for if we are in a ranging market are the overbought and oversold signals. Now, an oversold signal an oversold signal is when price comes all the way down to the lower band, closest at the exterior of the band. And then, we have a bullish, engulfing candle.

Now, let me just insert a rectangle, so you can better understand, and better watch what I am talking about. Now, this is an oversold signal. So, when the price comes all the way down, closest at the exterior of the band, and then we have a bullish engulfing candle. we have a signal to buy calls on whatever instrument you are trading. In this case, the GBP/USD.

Had we been trading these currency pairs at this time, we would have ended up in the money with this binary option, or this call option. Because, by analyzing price action in a 15 minute chart, you can choose to trade the hourly, or the 2 hour expiration option that would have expired in the money. Now, this is a signal to buy calls when we are trading in a range.

A signal to buy puts is the other way around. Price needs to close, or spike above or at the exterior of the upper band, and then we need a bearish engulfing candle for the setup to be authentic and for us to be able to trade a setup. Because, if you see right here, we have a spike high, a close above. But these candles do not engulf the blue candle. So, this is not a valid setup to buy puts. We have to be disciplined when we do this.

So, a value setup would be here. We have a spike high, above the upper or at the exterior of the Bollinger bands. On the upper side, then we have a huge, engulfing candle. And this is a valid setup to buy puts. If we are analyzing price action on the 15 minute chart, of course we choose an hourly or a two hour expiration option that would have ended up in the money. Because our entries is right here, and if we can four candles for one hour, and then another four candles for the two hour expiration option even an end of day expiration option would have ended up in the money.

Now, you need to look for valid setups. And if you look closely, we have another setup to buy calls using the simple overbought, and overbought oversold and overbought signals with the Bollinger bands. We have a spike low, and a close below the lower band. And then we have a bullish engulfing candle giving us a clear signal to buy calls on the GBP/USD.

Now, this is basically how you trade the overbought and oversold signals using the Bollinger bands. But this is not the only setup you will be looking for. Now, were going to go and find squeeze trades. Now lets go and look at the Aussie US dollar 5 minute chart, OK. This is the Aussie US dollar 5 minute chart, and we are going to go through the Bollinger band squeeze.

Now, the Bollinger band squeeze is when you are trading at trending market, OK? And once you are familiar with what trend-following trading really means, you can actually use this setup. Now lets get to it. First of all, lets plug in the Bollinger bands into this chart. Now, the first thing we want to look at is the actual trend. And as you can see, the middle bend, or the mover average, is moving up, so the actual trend is up.

This means that we are only going to look to buy calls in this currency pair on this session. Now, the second thing we want to do is to locate the Bollinger band squeezes. Now, where are these squeezes located? As you can see here, when price moves all the way from this low, to this high, the bands are expanding. And then, we have a squeeze. Now, lets put in some rectangles where the squeezes happen.

We have one squeeze here, but this squeeze is really small, so I dont think we can actually get a signal out of it. But, lets go and look for another squeeze, OK? Now, we have a second squeeze, right here. When rise starts to correct to a downside, OK? And we have a third squeeze, right here.

Now, the actual signal to play the squeeze, is this one. OK, prices moving up OK, we are in an uptrend. And when price starts to consolidate, and the Bollinger bands are contracting, you look for a close or a take out of the previous swing high. What does this mean? OK, we are training up, then we start to correct or we start to trade in a narrow range this makes the Bollinger bands contract.

And here you can see that we are making lower highs. This means that we are in a correction of the main move. And when we have a Bollinger band I mean, when price crosses above the moving average again, and closes above this high, right here, we have a trigger to buy calls on this currency pair. And had we been trading this currency pair on the 5 minute chart, we could have traded a 15 minute call option a 15 minute expiration call option, that would have ended up in the money.

So, this is how you play the Bollinger band squeeze. Whether youre in an up trend, or in a down trend. Remember that if you are in a down trend, you will be looking for a close below the previous swing low. In an up trend, you will look for a close above the previous swing high inside the squeeze, and this is where you get your signals.

And now, were going to look for the third actual setup that you can have using the Bollinger band squeeze. And this setup actually uses the Bollinger band squeeze in confluence with swing highs, and lows, and previous zones of support, and resistance. If we go back to the GBP/USD chart, I can show you exactly what I mean. Let me get rid of these triangles so you can because these triangles were used to explain the simple overboard and overflow signals.

But here, we also have what we call Bollinger band squeeze, with a fail to break the previous high, or the previous low. This is a very powerful signal. Now, let me explain this to you. Here, we have a trending market to the upside, or we have a swing high, OK? And after the swing high, we have a Bollinger band squeeze, OK? When we have a spike high or when we have a signal that the bands are, in fact, expanding and we have a failure to break the previous high, we wait for a break below the area of the actual squeeze.

Now, what am I talking about, the area of the actual squeeze? Let me explain this to you. When we have a swing high, and then a Bollinger band squeeze, and a failure to break the previous high, and then we break with the low of the squeeze, we have a single two bi-puts on this currency pair. Now, the actual entry on this single, will be the right here. When we come back and test this area of previous support as resistance, OK?

Now, we are using support a resistance, swing highs, and swing lows, and Bollinger band squeeze to trade a put option that would have ended up in the money, in this case. And, of course, if we are in the opposite side and we have a swing low, then a squeeze, then a failure to break that swing low, we are going to buy calls on the break above the the break above the area of resistance of the squeeze. I hope this was educational to you, and Ill see you guys on the next lesson.

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