Using Moving Averages in Binary Options

A lot of technical indicators for stock trading market analysis have been developed, but there is not a single trader who has not heard about Moving averages. In appearance, a simple, but very effective Moving Average (abbreviated to MA) is not only a separate analysis tool but also the basic component of many other algorithms for market valuation, which indicates its high efficiency and versatility.

More than half of the strategies offered on the Internet, like Binary Options trading systems, have MA’s, which means that every trader needs to know all the possibilities of this legendary (without exaggeration) market analysis tool.

Characteristics of the indicator

• Terminal: any
• Timeframe: any interval
• Type of indicator: trend
• Trading assets: any instruments
• Option expiration: depending on the timeframe
• Option Type: Put / Call
• Trading time: 24 hours
• Recommended broker: IQ Options

What is the Moving Average?

Moving Average is a stock market trend indicator that displays the average value of the underlying asset for a certain period of time on the chart. It is based on a mathematical formula, according to which MA averages the price of the asset for the time period specified in its settings and displays the resulting value on the chart in the form of a movement.

Why is the indicator called “moving”? The bottom line is that the developer has indicated a constant change in the values in his calculations - when new prices arrive, the old ones are automatically discarded, that is, the numbers in his formula constantly “move”, and the indicator itself is constantly dependent on price fluctuations. Accordingly, the MA ‘slides’ on the chart and its proximity to quotes depend on the number of candles considered in the settings.

Modern traders are lucky – today, the MA chart values are calculated automatically:

For this example, we use the IQ Options platform

An alone red line on the screenshot is a moving average. In this example, its setting is set to a period of 50.

Types of Moving Averages

Today, there are three main kinds of moving averages:

• Simple Moving Average – arithmetic simple moving average, referred to as SMA, or simply MA;
• Exponential Moving Average –professionals call it EMA;
• Weighted Moving Average –WMA.

A lot of derivatives of the above types have been invented. In general, they differ only by the smoothness: Time Series, Welles Wilder, Triangular, Vidya, Variable, and used to combine the accuracy of the settings in combinations with other technical analysis tools.

The indicator, depending on the type and period of settings, can be used, both for simple trend determination and for determining the momentum. In addition, thanks to special settings, the MAs themselves can act as a trend support or resistance line.

• SMA calculates the average arithmetic value of the asset, plus a certain number of previous price values and dividing their amount for the period specified in the settings;
• EMA in calculations is based on later values of the price, almost without taking into account the early prices, which allows it to respond more quickly to changes in the market trend. That is, the exponential average is the most dynamic one;
• WMA also considers the later prices to be more relevant, but it calculates its values differently. Each value of the WMA price is multiplied by the period set by it, after which it divides the total received sum of all prices by the period value.

Experts of financial trading recommend to use EMA at the shortest intervals, and simple and weighted - on longer ones.

Moving Average Periods

Despite the fact that the periods of long moving average do not have a limited range, most often the indicator is used in trading with periods of 200, 100, 50, 21, 7, which depends not only on the time frame used and the goal of using the indicator, but also on the combination with other indicators. In addition, MA’s with these periods is often combined to determine short-term trend reversals or the emergence of a new long-term trend.

For example, applying SMA with periods of 7 and 21, you can see short-term market reversals:

For this example, we use the IQ Options platform

Values of 200 and 100 are used to demonstrate a more global picture of the market. Round values of averages are often used to display the support and resistance lines of the trend. And, the short parameters will allow you to see the change in the value of the asset faster, but at the same time do not allow to filter the market noise to the necessary extent.

Moving Averages in Binary Options Strategies

As it was said, a myriad of trading strategies has been built on the basis of MA, both of simple and complex format of use. Let’s consider some of the most interesting ones:

1. Intersection with retest

To use the strategy, you will need two moving averages, one of which will be heavy and will hardly react to impulsive jumps of quotations, and the second one will be dynamic. As an example, we will use the values of 21 and 7 that we took previously. The main signal of the strategy will be displayed by the intersection of the slow (blue) MA with the fast red moving average.

Of course, entering by only one such indicator signal is risky, but if you do not use additional filtering oscillators, you need to wait for the rollback of quotes and enter the market at retests, that is, when the price makes an attempt to break the trend level - at the time of touching the quotes of a long (blue) MA.

For example, MA’s intersected in an upward direction, reporting the emergence of an upward trend. The deal with the UP forecast is made at the moment of crossing and at each touch with the price of the line with the long period:

For this example, we use the IQ Options platform

Transactions are made at each retest in the direction of the main signal that the moving averages showed.

2. Bounce off the average

In this variant of the strategy, only one EMA (exponential) moving with a long period of 200 is used, which acts as a trend resistance/support level. Accordingly, the principle of trade is built on the classical pattern of rebound quotes from the trend level, that is, from the MA.

For example, the location of the quotes above the moving average that is moving up indicates an uptrend, respectively, the breakdown and the closing of the price candle over the removals is used as a signal for trading with a forecast of the rebound of quotations upwards:

For this example, we use the IQ Options platform

Deals are only in the direction of the trend. In this case, the market is top-up, so rates are made each time with a forecast of an increase of the asset value.

3. Channel of Averages

This strategy is similar to the previous one by the mechanism of operation, however it uses long moving averages to draw 2 trend lines and one average one between them, that is, a price channel is formed, which resembles a price corridor formed by the Bollinger Band indicator.

To draw it manually, you need complex calculations, so the strategy uses a ready-made combination of averages, designed in the Envelope indicator. For work, you need a live charts service, where you can use an indicator to form an envelope (channel) from moving averages.

For example, by applying the Envelope indicator and setting the MA period to 20 and the offset of 2% (lines that create the envelope) in its settings, you can get a channel of averages, where deals are made on the rebound of quotes from the boundaries of the MA price channel:

Conclusion

The uniqueness and effectiveness of the moving average indicator lie in the fact that this technical tool will work absolutely in any market, regardless of the situation occurring on it. It can be used in a variety of formats and modifications, both as the main trend indicator and as a filter of trade signals. Therefore, the Moving Average must be in the arsenal of market analysis tools of any Binary Options trader.

Regards, Michael

ForexTraderPortal.com