Volatility Indicators and Binary Options – Guide

BROKER	SERVICE	TRADE NOW / REVIEW
1st	Asset: 300+ Min Sales: $1 Payout 3 Days *Profit Rate: 100%	TRADE NOW
2nd	Asset: 300+ Min Sales: $1 Payout 3 Days *Profit Rate: 100%	TRADE NOW
3rd	Asset: 300+ Min Sales: $1 Payout 3 Days *Profit Rate: 100%	TRADE NOW
4th	Asset: 300+ Min Sales: $1 Payout 3 Days *Profit Rate: 100%	TRADE NOW

Volatility indicators and binary options are a great combination. They can create simple yet highly profitable trading strategies. What’s even better: two of the strategies we’ll teach you can win you trades without requiring you to predict the direction the market will move – trading couldn’t be simpler.

In this article you will learn:

What are volatility indicators?
Why use volatility indicators for options?
Three Strategies for Volatility

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

What are volatility indicators?

Volatility indicators are technical indicators. That means they aggregate data of past market movements, apply a formula and display the results in a way that allows traders to quickly and simply understand what is going on and what will happen next.

Technical indicators focus only on price action. That means they ignore all the background information about the underlying asset, such as a company’s earnings or a country’s economic outlook. Instead, they analyze what happened to asset prices in the past and create predictions based on this analysis.

Volatility indicators are a special type of technical indicators. They measure the distance an asset strays from its mean directional value. This sounds complicated, but it’s simple:

When an asset has high volatility, it will move away from its average direction. An earthquake, for example, has high volatility. Things were silent for a long time, and now there is a strong movement that often changes direction. Highly volatile assets are subject to constant earthquakes. They often trade far from their moving averages and change direction frequently.
When an asset has low volatility, it has a strong sense of direction. Earth’s motion around the sun has low volatility, for example. Low volatility assets share this strong sense of direction. Their direction may change over time, but they trade closer to their moving average that the asset has more volatility and much less direction change.

Volatility indicators measure the volatility of an asset and display it in a way that makes it easy to predict what will happen next.

Examples of volatility indicators

There are two main types of volatility indicators:

The oscillator calculates a value and plots it on a separate chart, usually under the price chart. Present value and its relationship to past values allows for interpretations of what traders are thinking right now and predictions about what will happen next.
Channels use volatility to calculate the price channel and plot it directly into your main chart. The channel surrounds the current market price and predicts the range the market is likely to remain. Channels that predict that the market has moved too far from the average is likely to make traders nervous, which will cause them to invest in the opposite direction and bring the market back to the mean.

Consider examples of both types:

Example 1: Average True Range (ATR)

There are many fluctuations. The most accurate of these is the Average True Range (ATR). ATR wants to find out the average length of time an asset has moved in the past, but it uses a more precise calculation method than other metrics.

Other indicators use a fixed formula, for example always subtracting the current period’s high from the low. While this method is correct, it ignores gaps. Sometimes, the market jumps from price to price, 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 includes them in its calculation.

For a detailed explanation of ATR, please read our article on ATR. For this article, the important point is that ATR calculates the real range of each period and then generates an exponentially smoothed moving average.

The results tell you the true average range of the last periods. For example, when the ATR has a value of 0.1, you know that an average period has a 0.1 table in the past. You can use this value to predict future market volatility.

You can also interpret the value in relation to previous values.

If the value has dropped from £0.2 to £0.1, you know the market is losing energy.
If the value has risen from £0.05, you know the market is evaporating.

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

Example 2: Bollinger Bands

Bollinger Bands create a price channel around the current market price. The relationship of the market price to this channel helps you predict what will happen next.

The price channel of the Bollinger Bands consists of three lines:

A moving average as the middle line. A typical value for this moving average is 20 periods. Theoretically you can use any value you want, but this has worked best for most traders. When the market is above the midline, it acts as a support line. When the market is below the midline, it acts as a resistance level.
The upper and lower lines are based on standard deviation. Most traders use a value of twice the standard deviation for both lines. The upper line acts as resistance, the lower line as support.

Bollinger Bands predict that the market will be in the upper and lower lines. The midline works a barrier that can be either support or resistance. This means, when the market approaches a line, it is likely to turn around. While it can eventually break the mid lane, it is highly unlikely to move past the outer lanes.

For traders, Bollinger Bands allow for simple predictions. They provide clear indications for the accessibility of the movement and multiple resistance and support lines allow for easy trading.

Why use volatility indicators for options?

Binary options traders can profit from volatile indices much more than regular asset traders. There are two main reasons for this statement:

Some trades win alone

Traders of conventional assets cannot win a trade on volatility alone. For example, stock traders can use volatility indicators as a factor in their decision making, but volatility indicators say very little about whether an asset’s price will rise or fall – they just predicted that it would go somewhere .

This is unfortunate. Volatility indicators are one of the few types of indicators that can give clear predictions, but they are not enough to win stock trading, robbing them of the ability to create a simple mathematical strategy.

However, for binary options traders, knowing that the market is going somewhere can be enough to win a trade.

Volatility and Boundary Selection

Binary options offer a tool called boundary options. Boundary options define two target prices within equal distance of the current market price, one above the current market price and one below the price. When the market hits one of these target prices, you instantly win your binary option.

Boundary options are ideal for momentum indicators. For example, let’s say that an asset is trading at £100 and your broker offers you a boundary option with an expiry of one hour. Target prices are £100.20 and £99.80.

To predict whether the market can hit the target price, all you have to do is apply the ATR and set the time of your chart to one hour. Now two things can happen:

The ATR reads 0.2 or more. In this case, you know that an average period has moved £0.20 or more in the past. Since this will be enough for the market to hit the target price, you know that you will most likely win the boundary option
The ATR reads below 0.2. In this case, you know that an average period won’t be enough to win your boundary option. If you have reason to believe that the next period will be stronger than average, you can invest anyway, but this trade would be a bad idea based on the momentum indicator.

Depending on your risk tolerance, you can adjust your strategy. You can wait to invest until the ATR reads two or three times the distance to both target prices. The longer you wait, the fewer trading opportunities you will find. But you will win a higher percentage of your trades, which may be worth the trade-off for risk-averse traders.

Traders can triple profits with volatility indicators

There are many types of binary options. Usually, there are two or more similar types that differ only in the strength of the movement required. The type that requires a stronger movement compensates the trader by providing a higher payout.

For example, there are high/low options and ladder options.

The high/low option allows 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’ll get a payout of about 70 to 85 percent.
The boundary option allows you to predict whether the market will trade above or below the target price.
Predicting that the market will trade well above the target price well beyond the current market price, can net you up to 1,500 percent. Predicting that the market will trade above the target price below the current market price will get you a lower payout, maybe as little as 20 percent.

Bigger movement means higher payout potential

Simply put, predicting a stronger movement will get you a higher payout. The problem is, when you predict too strong a movement, you lose your trade and get no payout at all.

Momentum indicators like the ATR are ideal for predicting how strong of a move you should be anticipating.

Suppose, for example, your strategy predicts an uptrend for an asset that is trading at £100. If the ATR reads 0.2 for an hourly chart and your broker gives you an option choose the ladder with a target price of £100.10 and pay 150 per cent, you know you will most likely win this option. If you correctly predict an upward movement, you will likely win your option. Since the payout is twice as high as the high/low option, most traders would take the opportunity. If the ATR reads only 0.05, you should trade the high/low option.

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 insurmountable.

Volatility indicators can find new trades

Binary options traders can also use volatility indicators to generate trading signals. For example, when the market is moving into a Bollinger Band, you know it is likely to turn around. This is a prediction that you can trade.

Likewise, once the market has broken out of the Middle Bollinger Band, you know that it is likely to continue moving 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 also trade.

Other technical indicators allow similar predictions.

Three strategies for volatility indicators

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

Strategy 1: Combine Bollinger Bands with ATR

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

Bollinger bands can predict how far the market will move,
ATR can predict how long the market will take to get there.

Combined, both indicators give you enough information to trade binary options with high payout percentage.

Once the market has broken through the Middle Bollinger Bands, it will likely move to the Outer Bollinger Bands. This prediction is enough to trade a high/low option.

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

This strategy can make you money – but it limits your payouts to high/low options. ATR can make you more money with the same strategy. All you have to do is compare the value of the ATR with the distance of the next Bollinger Band.

Commercial example

Let’s look at an example. Let’s say you are looking at the hourly chart and the next Bollinger Band is 0.1 pounds away. The ATR has a value of 0.025. With this knowledge, you can predict that a completely straight movement will take the market to the next Bollinger Band in about 4 hours.

There’s only one problem: no one can guarantee you that all the stages will point in the same direction. When there is only one period of time in the opposite direction, it will take longer for the market to approach the Bollinger Bands.

To test your prediction, you can switch to the 4 hour chart. In our example, assume that the ATR reads 0.075 in this chart. That means that a 4-hour averaging period will not be enough to take the market to the next Bollinger Band. You should expect it to take a little longer, perhaps around five to six hours.

Volatile trading

This knowledge helps you to trade binary options with higher payout ratio than high/low option.

If your broker offers you a one-touch option with a target price in the gap of £0.05 and a 4-hour expiry, you know that there is a good chance you will win the option. The movement is within reach of the Bollinger Bands and the ATR indicates that the market will move the needed £0.05 level in less than four hours.
If your broker offers you a laddered 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 make it easy to generate signals, ATR makes choosing the right option type as simple as comparing a few numbers. You know what moves are at hand and all you have to do is choose the highest paying option type to profit from this movement. The whole process is simple and easy – that’s the power of momentum indicators.

Strategy 2: ATR Read Trading with Boundary Options

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

You create a price chart with ATR.
You place this price chart for a period of 5 minutes.
Now you compare the reading of the ATR with the boundary option your broker will give you expiry in five minutes. Two things can happen:
The indicator of ATR is greater than the distance to both target prices. In this case, you invest.
The indicator of ATR is less than the distance to both target prices. In this case, you do not invest.
You repeat this process for each expiration your broker offers you. Match the length of the period of your price chart with the expiry length, and if the ATR reading is greater than the distance from both target prices, you invest.

This strategy is very simple. The only thing you have to figure out is if you want a discount on the ATR reading. For example, you can claim a reading of the ATR as large as twice the distance to both your boundary option’s target price before you invest. Try a few discount values, and you’ll soon find a strategy that works for you.

Strategy 3: Trade scale options based on bollinger bands and price out of reach

Ladder options can do more than generate high payouts. They can also create very secure transactions.

When you predict that the market will trade below the target price far above the current market price, you are very likely to win this option.
When you predict that the market will trade above the target price much lower than the current market price, you are also very likely to win the option.

This strategy is simple and easy, but has a downside. Because it generates safe predictions, these get you very low payouts. When you predict that the market will trade below the highest payout when your ladder option expires, you can 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 could be enough to make you lose money at the end of the week. Therefore, you need a tool that can help you avoid the rare situation in which you will lose even a safe guess. Bollinger Bands are the ideal technical indicator for this job.

When a target price is outside the outer lines of the Bollinger Bands, it is very difficult for the market to reach it. To test your prediction, you can always invest in the target price with the highest payout outside the Bollinger Bands.

Of course, Bollinger Bands change with each new period. To use them for your trading strategy, you must match the time of the chart with the expiry of the binary option. When you think about trading a one-hour ladder option, you must use the one-hour chart and invest as soon as a new period begins. If 30 minutes have passed in the current period, you must adjust your chart to allow enough time in the current period for your option to expire. You can use a two-hour period, for example.

Trade Volatility Not Price

The beauty of this strategy is that it works without predicting the direction of the market. When a price is out of reach of the upper Bollinger band, you win your option if the market falls. You also have a high probability to win your option if the market falls. The same applies to a price that is out of reach of the lower Bollinger Bands.

To implement this strategy, simply follow these three steps:

Set the period of your chart to the shortest expiry your broker offers for the ladder option and apply the bollinger bands to the chart.
Compare target price with Bollinger Bands. Invest in the target price with the highest payout that is out of reach of the Bollinger Bands.
Repeat the process for each expiration your broker offers.

More risk management

You can also think about adding a margin of safety. You can do this by requiring the target price to be at a certain distance beyond the Bollinger limit.

Applied correctly, this strategy can find you one in ten trading opportunities every day. You can check each chart each time it creates a new period. For example, if your broker offers ladder options with a expiry of five minutes, you can check the chart every five minutes. If only 50 percent of these checks give you a trading opportunity, you will still find six opportunities every hour.

If your broker also offers ladder options with durations of 15, 30, 60, 120 and 240 minutes, you can also add these charts to your trading strategy. Now, you can find more trading opportunities.

In this way, this strategy can find you many low risk trading opportunities even if you are only trading two or three hours a day. Your profit per trade will be small, but based on a lot of trades you can still make a lot of money.

Conclusion

Volatility indicators and binary options are a great combination. Indicators like Bollinger Bands and Average True Range (ATR) help you predict the range of a movement and the direction the market is likely to move.

You can combine both indicators to trade highly profitable binary options, trade boundary options based on ATR only 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.

Volatility indicators offer hundreds of possible trading strategies. You can choose what you like best, but you should at least consider adding volatility indicators to your strategy. Volatility is an important feature of any market environment, and you should at least keep an eye on it.