How to use volatility in Binary Options trading?

A binary option is a financial instrument that lets traders invest in the market to gain profit. The popularity of binary options trading lies in its simplicity. That’s because this trading is based on a simple outcome of yes or not. 

As a trader, you need to analyze the market and check the price movement of the asset. After doing that, speculate whether the price of the asset will increase or decrease. If you have correctly predicted the market, you can expect a huge payout. Otherwise, you will lose all of your invested money. 

Now, a few things can increase your payout and enhance your chances of winning, like volatility. But do you know what volatility is in binary options? How it influences the price? What are different volatility indicators? And why should you use them? 

We have answered all these questions in this post. Scroll down to have a look. 

What is volatility? 

Volatility in binary options trading means how much the price of an asset has traveled in a given time. If the price does not change, that means volatility is low. On the other hand, if the price has increased or decreased, that shows the volatility of an asset is high. 

In general, volatility is good for binary options. That’s because if you invest in a highly volatile market, the payout amount is more. But similarly, the risk of losing money also increases. 

You can play safe by investing in a mildly volatile market or a flat market. But then the payout will also be less. 

How volatility influences the price of Binary Options?

Here’s a quick example that shows how volatility influences the price. 

Let’s assume that you have invested in gold when its strike price is $1200. Its underlying price is $1190, and its expiry time is 1 hour. So, now the chances of the market coming up by $10 in the next one hour depends on the volatility of the asset. 

Here are two possibilities. If the price of gold has moved between the price range 1188 to 1194, it’s seen as the flat market. The price has definitely changed, but investing in such a market is risky because it’s not seen as a highly volatile market. 

On the other hand, if the price has moved between 1180 to 1220, it means that the asset is trending. And an asset only trends if its volatility is high. Also, it shows that the possibility of price reaching or crossing the margin of $1200 is very high. Thus, you can trade.  

A volatile market has a higher chance of covering a large price difference in a short time. And if you want to use volatility for trading binary options, you should know about volatility indicators. 

What is a volatility indicator? 

A volatility indicator can be seen as a tool that you can use for understanding how much an asset has moved from its original place. You can use this indicator to know the correct period of high and low volatility. 

Volatility indicator and binary option is a great combination because your chances of earning a huge payout increase when they are combined. 

This indicator uses past market movements of the asset, its price and applies a formula to them. Then the result is displayed quickly so that traders can make a winning move. 

One thing that you should know is that technical indicators like the volatility indicator only use price action. That means it entirely eliminates other information like the economic aspect of the country or the earnings of a company. 

Here are two situations that are most likely to occur. 

  • An asset has high volatility, which means it strays far from its average direction. 
  • An asset has low volatility, which means it has a strong sense of direction. 

Volatility indicators for Binary Options 

These are a few volatility trading indicators that you can use for binary options trading. 

Historical volatility

It shows how the volatility of an asset has changed in the past. It’s done by calculating the price movement of an asset from its standard position over a set period. You can assume that high volatility assets have a higher standard deviation. 

It’s a great tool because it lets the trader understand how much movement an asset is likely to do. Remember that the movement by the asset can be in any direction. 

Implied volatility 

It is defined as how volatile an asset is expected to be. The difference between implied and historic volatility is that this one is related to the price of the standard option to the price of underlying assets. 

You can use this indicator to know the extremes of the market. For example, if the implied volatility is high or low, you can conclude that the market is about to change its direction. 

Relative volatility 

This indicator measures market movements in relation to the past price history of an asset. It ideally moves between 0 to 100 based on ten days or bars data. With this particular indicator, you can easily measure market strength. 

If this indicator is below 50, it shows negative strength. And if it’s above 50, it shows positive strength. 

Bollinger band 

It’s another fantastic indicator that you can use for increasing your chances of winning a trade. This amazing tool uses the standard deviation of price and a pair of signal lines to create a moving average and volatility envelope. 

Why you should use volatility indicators?

Are you wondering how using volatility indicators can make an impact? Here are a few reasons to use this tool. 

  • Some trades can be won simply by using volatility indicators. 
  • If you apply volatility to your existing trading strategy, you can nearly triple your profits. 
  • With the help of volatility indicators, you can find new trades. 

To generate better results with volatility indicators, you can use one of these three strategies. 

The first way is to combine Bollinger Band with Average True Range (ATR). These two technical indicators can help you understand how far an asset has traveled and how long the market will take to reach that position. 

The second is to combine the readings of Average True Range (ATR) with boundary options. And lastly, you can trade using ladder options. 

Conclusion 

The volatility indicator is one of the best tools that you can use to increase your chances of winning a trade. You can combine it with other strong indicators like Bollinger Band and Average True Range. This way, you can accurately predict the range of movement and direction. 

But while using this indicator, you need to stay careful because, in the end, the binary option is a risky trading environment. So, always analyze the risk and then make a move. 

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