A Look At Moving Averages For Binary Options

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A Look At Moving Averages For Binary Options

Moving averages are one of the most basic and least talked about technical indicators I know. It seems surprising, nearly every strategy article or analysis will include some mention of a moving average but few actually talk about them. Binary options traders should find them especially useful; moving averages can provide reliable directional entry signals in multiple time frames, can do this on a single chart and are great coincident indicators. Why does this matter to binary traders? Binary options are all about directional movement, will an asset be higher or lower than it is now? Moving averages track the movement of an asset and provide the first clues as to where price may be heading next.

What is a moving average and why does it move? The most basic definition is that a moving average is a line plotted using the average price of an asset over a set period of time. For example a 30 bar simple moving average is a line created by plotting the price of an asset over the past 30 bars or trading sessions. If you are using a chart of daily prices then it is a 30 day moving average, if you are using a 15 minute chart then it is an average of the past 30 15 minute bars. Each period as a new closing price is added to the data list another is dropped off the end. In this way the average “moves” along with the asset and provides the name of the tool.

How Do You Use A Moving Average

Moving averages a can be set to different time frames. Different time frames mean different signals. In order to do this simply change the number of bars used to calculate the moving average. This is usually a simple change on most platforms. Popular moving averages are 9 bar, 15 bar, 30 bar, 150 bar and 200 bar. The chart below illustrates a daily chart of the Dow Jones Average with 30 and 150 day moving averages. Typically, the longer the time frame the longer term and stronger the signal. Shorter term time frame means shorter term signals. In addition moving averages can also be applied to different length charts for different types of analysis. In my first example I chose the 30 bar moving average because that is the one I use most. When my charts are set to daily candlesticks it is a 30 day moving average and then when I move up to a chart of weekly prices it turns into a 150 day moving average (30×5 days per week). If I move down to a chart of hourly prices then my moving average is a 30 hour moving average.

Adding to the mix is the choice of simple or exponential moving average. To recap, a simple moving average is an average of the last X number of data with each data point getting equal weight. As a each day closes it is added to the list and the last days data is dropped off. An exponential moving average is exactly the same except that today’s data is given more weight than yesterday’s and yesterday’s more than the day before and so on down the line until you reach the end of the sample. Because the front end of the data is given more weight it responds to price changes quicker than a simple moving average. It also tracks prices more closely and can give more false signals. If you look at the chart above you can see what I mean. The exponential moving average is moving over and under the simple moving average even though they are set to the same time period. The same is true for the pair of 150 day moving averages.

How To Apple Moving Averages To Binary Options

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The answer to that question can take up volumes, maybe shelves, of books. However, there are a few key areas in which moving averages are particularly helpful. The first is trend. A moving average is, or can be, the first step in determining a trend. If the MA is pointing up then the asset is moving higher on average, otherwise known as trending up. If it is pointing down then the asset is trending down. Because you can use different periods with your moving average it is possible to measure trend in more than one time frame on the same chart at the same time. The chart above shows an asset that is trending up in the long term (150 bar MA’s) and sideways to uppish in the shorter term (30 day moving averages). Moving averages can also provide support and resistance targets. The chart above shows an asset that is supported in the long term evidenced by the bounce in prices from the long term 150 bar EMA. Notice how this asset is also getting some volatility when it crosses the 30 bar MA’s. This could be a potential entry signal for binary traders.

Two other important ways that advanced binary traders can use moving averages is for wave analysis and as a coincident indicator. A chart filled with moving averages of different lengths is a basic form of wave analysis and one that can be quite effective. Each moving average provides a targets and signals for entry, when one average crosses another a signal is given, the more averages that get crossed the stronger the trend. The chart below shows what I mean. A series of MA’s can provide accurate wave style analysis and accurate entries for binary options traders. In essence each moving average confirms another as the asset moves higher or lower which leads to my next point. Moving averages are a great coincident indicator. If you are getting a signal from just about any other technical indicator throw a couple of MA’s up on the chart and see what they look like along side your original analysis.

7 Binary Options

One of the most underused and least talked about analysis tools when it comes to binary options trading is that of moving averages. Sure, these are mentioned in many types of analysis tools, but they are rarely talked about in depth. What makes this all the more peculiar is that binary option trading is all about directional movement. Let’s take the opportunity to look at moving averages more closely.

In a lot of strategy scenarios it is very difficult at best to determine the correct movement trend of an asset every single time because of price fluctuations and other short term trends. That is where moving averages come into play; they are a great way of minimizing the effect of these short term trends that often keep you from seeing the correct trending direction. Moving averages are simply calculating the average price of an asset over a set period of time.
One of the nice characteristics about moving averages is that they can be determined using different time frames. The basic thinking behind them is the longer the time frame they are based on, the stronger their indication signal is. The time frames represented within moving averages are called bars. Some of the more popular numbers of bars used to plot moving averages are 9, 15, 30, 150 and 200 bar ranges.

There are three key things that moving averages help you spot that are critical to making successful binary option trades:

1) Trends – in order to trade successfully you have to know which way an asset is trending.

2) Wave Analysis – wave analysis can be a very effective tool in spotting potential entry points in which to make a trade. Several moving averages calculated by using different time frames and then plotted together on the same chart form the basis for wave analysis to take place.

3) Coincident Indicator – If you are not sure of anidentifying signal from other technical indicators, it is often a good idea to overlay them with moving averages for comparison.

As you can see, moving averages are extremely useful tools to keep statistical analysis in balance and to keep trends from looking too skewed. This helps you to be able to see the data more accurately and clearly, in turn, you should be able to make more successful binary option trades which are based on that data. So even though moving averages are often not talked about that much, they play a very large role in successful binary options trading.

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Trading binary options using a Moving Average crossover strategy

One of the first trading strategies that any new trader will likely learn is some variation of a moving average crossover strategy. The main reason why this is so popular with traders across all assets is that it is both reasonably reliable but ultimately very simply to execute. Binary options traders have successfully employed the crossover strategy in the same way that both forex and stock traders have previously done, allowing for relatively low risk trading and the comfort of a high probability that the trade will be successful.

How to set up the MA crossover trade

If keeping is simple is the golden mantra of trading then this strategy is just about as simple as it gets. The Moving average crossover strategy relies on just two individual indicators in order to generate higher or lower trading signals which can be interpreted as purchasing binary options either short or long. Since Moving averages can vary, choosing the number of bars to be incorporated in the moving average is critical to generating accurate signals. It is generally assumed that binary options traders will need a ‘slow’ moving average such as the 20 or 22MA and a ‘fast’ moving average for which the 5 or 6MA are considered good examples. When these two moving averages are applied to any price chart, on any time frame it is instantly recognisable that they often come together and move apart as the price rises and falls. Looking closely, the MA’s also cross over, with the shorter MA weaving in and out of the slower MA line. It is these crossovers between the slow and fast MA’s which generate the buy or sell signals.

Applying the crossover strategy to binary options

For this strategy to be most effective, binary options traders are encouraged to use the crossovers of the 5MA with the 20MA in order to find potentially profitable trades. It is worth bearing in mind that a moving average is also a ‘lagging indicator’, meaning that it will often be behind the market and therefore the entry signal may occur after the market has moved higher or lower. Whilst it would be ideal to be able to enter the market before an initial move up or down, a quick look at any price chart will show you that price will often stay consistently above or below the entry price as the options expire in the money. Remember, unlike forex trades, we are not looking to find the perfect entry in order to gain as many pips as possible but only for the price to remain above or below the entry price until our options expire.

Tips to make the MA crossover strategy more successful

Some important factors to take in to account when trading an MA crossovers include choosing the correct time frame. Whilst the sixty second binary options may be the most exciting option, this strategy works best with the higher time frames such as the 30 minute or 1 hour charts. Additionally, waiting for a confirmed crossover will mean waiting for the previous bar to close before purchasing options in the direction of the crossover. This is helpful because moving averages are lagging indicators and will only become fixed once the current bar has closed.

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