Binary options moving average crossover strategy
Most moving averages are based on a math formula that calculates daily close price. In addition to these main types of moving averages, there are other custom moving average indicators, such as the Arnaud Leroux. The simple moving average, or SMA, is based on calculating the average price over a fixed period of time.
This is also referred to as the look back period of the moving average. Shorter versions include the and day moving average as well. One of the main drawbacks with the simple moving average is that it remains constant. Thus, any immediate price increases or decreases take time to be reflected.
To make the moving average more sensitive to the recent prices, the exponential moving average is used. The EMA has the same calculation as that of the simple moving average. However, more weightage is given to the recent price. This ensures the EMA is more reactive to the latest change in prices.
The moving average indicators are based on the closing price. However, traders can use their own variations and use the high, low, close, open or mid-price and build the moving average accordingly. Trend identification is an important concept when using the moving average indicators. Price of a security is said to be in an uptrend when it makes higher highs and higher lows.
At the same time, price tends to be above the moving average. Similarly, a downtrend occurs when the price of a security makes lower highs and lower lows. Price also trades below the moving average, signalling the trend is down.
Based on the trends, traders can look for appropriate positions in the markets. One can place a Call or Put binary option when there is a bullish or bearish crossover of the moving averages. The trends can also change depending on the time frame being used. For example, you may find the price action is in an uptrend on an hourly chart, but the 5-min chart shows price is in a downtrend.
This is because price seldom moves in a straight direction. It often makes a pull back and moves in a zig-zag fashion. Thus, traders should always ascertain the main trend and then trade in the direction of the main trend on lower time frames. Traders are able to better pick their positions in the market and trade in the majority. Of course, counter trend trading can also be done when the price is moving in an opposite trend in the lower time frame.
Using two moving averages is also referred to as the double crossover strategy. Notably, quite often after a bullish or a bearish moving average crossover, price tends to pull back before resuming the trend. Therefore, sometimes, it is better to wait for the pullback instead of simply going for a Call or Put trade. The moving average crossovers are based on using one short-term moving average and the long-term moving average.
The double crossover strategy is based on the following concept: A bullish crossover with the short-term over the long-term MA is also known as the golden cross. This can be applicable to the period and the period moving average. Traders could look to buy when the price pulls back to the MA, preferably with the aid of other indicators or strategies.
Figure 2 shows this in action. The price respects the SMA during the uptrend, but then breaks below it the next time. This indicated a larger reversal was underway, and potentially a full-fledged trend reversal which is what occurred. In other words, the price will continues whip back and across the SMA causing multiple false signals and losing trades.
Once again, risk management and finding a way to profitably exit is up the trader. Having two moving averages of different lengths on your chart can provide additional trade signals.
Longer-term traders will commonly use a day and day. Day traders may use a period and 15 or period likely minutes. When the shorter MA crosses above the longer MA it shows buying is picking up and presents a potential buying opportunity. Similar to the price-crossover strategy, it is possible to get multiple false signals when the MAs crisscross back and forth.
To help avoid this, only take trades in the direction of the overall trend. The SMA is a straight forward tool that is applied to the chart and shows the average price over a specific period of time. It can also be used for price and MA crossovers.