Bollinger Bands - momentum and volatility

July 3rd, 2009 by admin

Bollinger Bands are Options Trader’s Best Tools

Bollinger bands are designed to contain the price action (volatility) about 95% of the time. However, it’s the other 5% of the time that we want to capitalize on. You want to seize those opportunities when the price drops below the bottom band (noting an extremely oversold state).

Since the currency is in an overall upward move, there’s a huge likelihood for a good snap back in my favor to boost my options price AFTER I’ve bought it outside of the Bollinger Band so cheaply.

Many times, it will be best to let the momentum start to reverse and the price to start to head back into the band before buying your “call option”.

Of course, if you wanted to buy a put option (because you think the pair will drop in price soon,) you could buy the put when its option value is very cheap.

That’s when the pair soars/spikes higher. This time you want to see it pierce the top Bollinger Band and reverse its momentum to where it’s about to head back inside the bands. At that point, you would buy the put (while it’s still cheap and everyone else is scared to step up and buy it).

Then as the price bounces downward, the option’s price soars and you can close out the put to capture your gains.

Note: It’s usually best to take only the trade that is in line with the longer-term trend direction since your best odds lie there. Also, the momentum is likely to get you past your strike price well before your expiration date going “with” the trend’s overall direction.

Three Steps to Successful Options Trading

fxud 070309 image2 Bollinger Bands momentum and volatilitySo as you can see, there are several pieces of the puzzle to get right in an options trade.

1. You have to call the direction correctly.

2. You need to buy a contract that is far from expiring (several months or more) so that the erosion doesn’t work against you.

3. You have to seize those rare moments and know when to recognize them within a short window of time. That way you can get in at the right price.

It’s very crucial to get all of these pieces right at once. You can do that using Bollinger Bands. Just keep in mind, to mind your risk levels…and you’ll be on your way to earning those 200% and 300% gains in options.

 

By Sean Hyman - worldcurrencywatch.com

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Posted in Currency Markets, Forex Signals, Fx Forex, Online Currency
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