Volatility indicators and binary options are a great combination. They can make simple but very profitable trading strategies. What’s even better: the two strategies we’ll teach you can win trades without requiring you to predict which way the market will move – trading couldn’t be easier. In this article, you will learn:

  • What is a Volatility Indicator?
  • Why Use Volatility Indicators For Options?
  • Three Strategies For Volatility

With this information, you will be able to create your profitable binary options strategy based on volatility indicators.

What is a Volatility Indicator?

The volatility indicator is a technical indicator. This means they aggregate past market movement data, apply formulas, and display the results in a way that allows traders to quickly and easily understand what is happening and what will happen next. Technical indicators only focus on price action. This means they ignore all the basic information about the underlying asset, for example a company’s earnings or a country’s economic outlook. Instead, they analyze what has happened to asset prices in the past and make predictions based on this analysis. The volatility indicator is a special form of technical indicator. They measure the extent to which an asset deviates from its mean directional value. This may sound complicated but it’s simple:

 

  • When an asset has high volatility, it is far from the average direction. Earthquakes, for example, have high fluctuations. Things have been quiet for a long time, and now there is a strong movement that often changes direction. Assets with high volatility experience regular earthquakes. They often trade away from their moving averages and change direction routinely.
  • When an asset has low volatility, it has a strong sense of direction. The movement of the earth around the sun has low volatility, for example. Assets with low volatility have a strong sense of direction. Their direction can change over time, but they trade closer to their moving averages than assets with higher volatility and direction changes less.

The volatility indicator measures the volatility of an asset and displays it in a way that makes it easier for you to predict what will happen next.

Examples of Volatility Indicators

There are two main types of volatility indicators:

  1. Oscillators calculate values ​​and draw them into a separate chart, usually below the price chart. Current values ​​and their relationship to past values ​​allow interpretation of what traders are thinking and for predictions of what will happen next.
  2. Channels use volatility to calculate price channels and draw these channels directly into your main chart. Channels surround the current market price and predict the range in which the market may remain. Channels predict that markets that move too far from the average tend to make traders nervous, which will lead them to invest in the opposite direction and bring the market back to the average.

Let’s look at examples of both types:

Example 1: Average True Range (ATR)

There are many oscillators up and down. The most accurate is True True Range (ATR). ATR seeks to find out how far the average period of an asset has moved in the past, but uses a more accurate calculation method than other indicators. Other indicators use a fixed formula, for example always deducting the current high from the low. Although this method is accurate, it ignores gaps. Sometimes, the market jumps from one price to another, which creates a gap in the market. Momentum indicators that ignore these gaps paint a distorted picture. The main advantage of ATR is that it recognizes gaps and forces them into its calculations. For a detailed description of ATR, please read our article on ATR. For this article, the important point is that the ATR calculates the range real  each period and then create a smooth moving average. The result tells you the true range of the average of the last period. For example, when the ATR has a value of 0.1, you know that the average period has £0.1 in the past. You can use these values ​​to predict various future market movements. You can also interpret values ​​in relation to previous values.

  • If the value drops from £0.2 to £0.1, you know that the market is losing energy.
  • If the value has increased from £ 0.05, you know that the market is fishing.

Both trends are likely to continue. They create different situations that require different trading strategies, and ATR helps you to identify which one is right for you right now.

Example 2: Bollinger Bands

Bollinger Bands create price channels around the current market price. The correlation of market prices with these price channels helps you predict what will happen next. Bollinger Bands price channels consist of three lines:

  • The moving average is the middle line. A typical value for this moving average is 20 periods. In theory, you can use any value you want, but this value has worked for most traders. When the market is above the middle line, it serves as a support line. When the market is below the midline, it serves as a match.
  • Top and bottom lines based on standard deviation. Most traders use a value of twice the standard deviation of both lines. The top line serves as resistance, the bottom line as support.

Bollinger Bands predict that the market will remain above and below. The middle line serves as a barrier that can be either support or resistance. This means that, when the market approaches the line, it may change. Although it may eventually break through the middle line, it is unlikely to move past the outer line. For traders, Bollinger Bands allow easy forecasting. They provide a clear indication of the range of possible moves and many resistance and support lines that allow for easy trading.

Why Use Volatility Indicators For Options?

Binary options traders can profit from volatility indicators more than conventional asset traders. There are two main reasons for this statement:

Some Winning Trades Roll Down On Their Own

Conventional asset traders cannot win trades on volatility alone. For example, stock traders may use volatility indicators as a factor in their decision-making process, but volatility indicators say little about whether an asset’s price will rise or fall – they only predict that it will go  somewhere  . This is unfortunate. Volatility indicators are one of the few types of indicators that can provide clear predictions, but they are not enough to win stock trading traders, robbing them of the possibility to create a simple mathematical strategy. However, for binary options traders, knowing that the market is going somewhere is enough to win the trade.

Volatility and Frontier Options

Binary options offer a tool called border options. A boundary option defines two target prices within equal distance of the current market price, one above the current market price and one below it. When the market reaches one of the target prices, you immediately win your binary option. Boundary options are suitable for momentum indicators. For example, suppose that an asset is traded at £100 and your broker offers a border option with an expiration of one hour. Target prices are at £100.20 and £99.80. To predict whether the market can reach the target price, all you need to do is use ATR and set your chart period to one hour. Now two things can happen:

  1. ATR reads 0.2 or more. In this case, you know that the average period has moved £0.20 or more in the past. Since this is enough for the market to reach the target price, you know that there is a good chance that you will win the border option
  2. ATR reads less than 0.2. In this case, you know that the average period is not enough to win your border option. If you have reason to believe that the coming period will be stronger than average, you may invest anyway, but this trade would be a bad idea based on momentum indicators.

Depending on your tolerance for risk, you can adjust your strategy. You can wait to invest until the ATR is read twice or three times more than the distance to both target prices. The longer you wait, the less trading opportunities you will find. But you will win a higher percentage of your trades, which can be a tradeoff for risk-averse traders.

Traders Can Take Third Profits With Down Indicators

There are many types of binary options. Often, there are two or more of the same type that differ only in the strength of movement required. Types that require stronger moves compensate the trader by providing higher payouts. For example, there are high / low options and stairs.

  • High / low options allow you to predict whether the market will trade higher or lower than the current market price when the option expires. If you’re right, you get paid around 70 to 85 percent.
  • Boundary options allow you to predict whether the market will trade higher or lower than the target price. Predicting that the market will trade higher than the target price which is far above the current market price, can make a payout of up to 1,500 percent. Predicting that the market will trade above a target price that is below the current market price will bring you a lower payout, perhaps as little as 20 percent.

Bigger Moves Given Higher Payout Potential

In short, predicting stronger moves will earn you higher payouts. The problem is, when you predict too strong a move, you will lose your trade and not get paid at all. Momentum indicators such as ATR are ideal tools for predicting how strong a move you need to predict. For example, your strategy predicts an upward movement for an asset trading at £100. If the ATR reads 0.2 for the one-hour chart, and your broker offers a ladder option with a target price of £100.10 and a payout of 150 percent, you know that there is a good chance that you will win the choice. If you predict the upward movement correctly, you will probably win your selection. Since the payout is double with the high/low option, most traders will take the chance. If the ATR will read only 0.05, you need to trade high/low options. In this simple way, momentum indicators can help you increase your average payout without having to change your basic trading strategy. For serious traders, this gift is impossible to miss.

Volatility Indicators Can Find New Trades

Binary options traders can also use volatility indicators to create trading signals. When the market moves towards Bollinger Bands, for example, you know that it is likely to change. This is a prediction that you can trade. Similarly, when the market has crossed the middle Bollinger Band, you know that it will probably continue its movement until it reaches the outer Bollinger Band. This knowledge provides a clear indication of how far the market will move, which is a prediction you can trade as well. Other technical indicators allow for similar predictions.

Three Strategies For Down Indicators

We have touched on three ways in which you can trade infertility indicators. Now we need to define a concrete strategy that you can trade. Let’s take a closer look at how you can trade binary options with volatility indicators.

Strategy 1: Combining Bollinger Bands With ATR

This strategy is very interesting for this article because it combines the advantages of the two momentum indicators that we have focused on. The advantages are:

  1. Bollinger Bands can predict how far the market will move,
  2. ATR can predict how long it will take the market to get there.

Combined, both indicators give you enough information to trade binary options with high payouts. When the market has crossed the middle Bollinger Band, it may move to the outer Bollinger Band. This forecast is only for trading with high / low options.

  • When the market has crossed the middle Bollinger Band in an upward direction, you invest in a high option.
  • When the market has crossed the middle Bollinger Band in the downward direction, you invest in a low option.

This strategy can make you money – but it limits your payout to high / low options. ATR can help you make more money with the same strategy. All you need to do is compare the ATR value to the next Bollinger Band interval.

Trade Examples

Let’s look at an example. Suppose you look at the hourly chart and the next Bollinger Band is £0.1 away. ATR has a value of 0.025. With this knowledge, you can predict that a straight move will take the market to the next Bollinger Band in about 4 hours. There is only one problem: no one can guarantee you that all periods will point in the same direction. When only one point is in the opposite direction, it will take longer for the market to reach the Bollinger Bands. To check your forecast, you can switch to the chart with a 4-hour period. In our example, let’s assume that the ATR reads 0.075 in this chart. This means that the 4-hour averaging period is not enough to bring the market to the next Bollinger Band. You should expect it to take some time,

Volatility Trading

This knowledge helps you to trade binary options with higher payouts than high/low options.

  • If your broker offers a one-touch option with a target price at a distance of £0.05 and an expiration of 4 hours, you know that there is a high probability that you will win this option. This movement is within the range of the Bollinger Band, and the ATR indicates that the market will move the necessary £ 0.05 in less than four hours.
  • If your broker offers a ladder option with a target price of £ 0.05 from the current market price, the same calculation applies as in our first example.

This strategy is simple and profitable. Bollinger Bands help you to make signals easily, ATR makes choosing the right type as easy as comparing some numbers. You know which moves can be achieved, and all you have to do is choose the type of option with the highest payout to profit from these moves. The whole process is simple and easy – that’s the power of the momentum indicator.

Strategy 2: Trade ATR Readings With Border Options

We have already touched on this strategy. For traders who want to implement it, we will explain it in detail. The process is simple and only requires you to compare a few numbers. Here’s what you do:

  1. You create a price chart with ATR.
  2. You set this price chart for a period of 5 minutes.
  3. Now you compare the ATR reading with the limit option that your broker is offering you for the five-minute expiration. Two things can happen:
    1. The ATR reading is greater than the distance to both target prices. In this case, you invest.
    2. The ATR reading is smaller than the distance to the two target prices. In this case, you don’t invest.
  4. You repeat this process for each expiration that your broker offers you. Match your price chart period to expiration, and if the ATR reading is greater than the distance to both target prices, you invest.

This strategy is simple. The only thing you need to think about is if you want a discount reading the ATR. For example, you may want the ATR reading to be twice the distance to both target prices of your border option before you invest. Try several discount values, and you will find the right strategy for you.

Strategy 3: Ladder Option Options Based on Bollinger Bands And Skipped Prices

Ladder options can do more than make high payouts. They can also make very safe trades.

  • When you predict that the market will trade below the target price which is far above the current market price, you will most likely win this option.
  • When you predict that the market will trade above the target price which is far below the current market price, you will most likely win this option as well.

This strategy is simple and easy, but there is a catch. Because it generates safe predictions, these predictions give you very low payouts. When you predict that the market will trade below the highest payout when your ladder option expires, you may only get a 10 or 20 percent payout.

Reduce Risk With Bollinger Bands

Low payouts require you to win a high percentage of your trades to make money. Just a few losing trades may be enough to lose money at the end of the week. Therefore, you need a tool that can help you to avoid the rare situation where you will lose a safe prediction. Bollinger Bands is the ideal technical indicator for this job. When the target price lies outside the outer line of the Bollinger Bands, the market is very unlikely to reach it. To check your forecast, you can always invest in the target price with the highest payout that is outside the Bollinger Bands. Of course, Bollinger Bands change with each new time. To use it for your trading strategy, you need to match your chart period until your binary option expires. When you think about trading ladder options with one-hour expiration, you need to use one-hour charts and invest right when the new period starts. If 30 minutes have passed in the current period, you need to adjust your chart to leave enough time in the current period for your option to expire. You can use a period of two hours, for example.

Trading Volatility Is Not Priced

The beauty of this strategy is that it works without predicting the direction of the market. When the price is outside the range of the upper Bollinger band, you win your option if the market falls. You may also win your option if the market falls. The same goes for prices that are outside the range of the lower Bollinger Band. To implement this strategy, you only need to follow the following three steps:

  1. Set your chart duration to the shortest expiration that your broker offers for ladder options and apply Bollinger bands to the chart.
  2. Compare target prices to Bollinger Bands. Invest in the target price with the highest payout that is outside the Bollinger Band range.
  3. Repeat the process for each expiration offered by your broker.

Further Risk Management

You might also think about adding a margin of safety. You can do this by requiring the target price to be a certain distance outside the Bollinger band. Applied correctly, this strategy can find you ten trading opportunities per day. You can check each chart every time it creates a new period. If your broker offers ladder options with five-minute expirations, for example, you can check the chart every five minutes. If only 50 percent of these checks give you trading opportunities, you’ll still get six opportunities every hour. If your broker also offers ladder options with 15, 30, 60, 120, and 240 minute expirations, you can add these charts to your trading strategy as well. Now, you can get more trading opportunities. This way, this strategy can find many low-risk trading opportunities even if you trade only two or three hours per day. Your profit per trade will be small, but based on many trades, you can still make a lot of money.

The conclusion

Volatility indicators and binary options are a great combination. Indicators such as Bollinger Bands and Average True Range (ATR) help you to predict the range of movements and the direction in which the market may move. You can combine both indicators to trade highly profitable binary options, trade limit options based on ATR alone, or use Bollinger Bands to trade ladder options. Alternatively, you can also add either indicator to your strategy to avoid bad trades and achieve higher payouts. The volatility indicator offers hundreds of possible trading strategies. You can choose the one that works best for you, but at least you should consider the volatility indicator for your strategy.