Moving Average Strategy
Moving Average Strategy
How Can you Use Moving Averages (MAs) in your Binary Options Strategies?
The Simple Moving Average (SMA) indicator displays values that are calculating by adding the closing prices of the last N period and then dividing the result by the number of N periods. You should note that the Simple Moving Average is a lagging indicator that you can utilize to predict future price movements using past price data.
You will also discover that this indicator is more reliable and provides more accurate readings when you use it with an increased number of periods. However, when doing so the SMA has the disadvantage of then responding slower to new price developments.
As with many binary options strategies. the easiest-to-understand ones are often the best. The moving average strategy that is structured on the 5 period and 20 period crossovers definitely fits this bill which has acquired an impressive reputation for being one of the most effective binary options trading tools.
The fundamental concept could hardly be any simpler. You can detect quality trading opportunities whenever the 5 period moving average climbs above or drops beneath the 20-period moving average. Specifically, an upwards crossover generates a buy signal while a downwards one signals a sell alert.
Most advocates of this moving average strategy tend to opt to use it on trading chart displaying the hourly time-frame. This is because crossovers are then often created during the current period. However, you must always remember that moving averages are lagging indicators. This feature implies that when you do detect a crossover, the entry point for your new binary option will lag behind prevailing market conditions.
Example of the Moving Average Strategy
The following chart demonstrates a strategy based on the 5 period and 20 period moving averages. Crossover points are displayed at which you should consider opening CALL and PUT binary options.
As different assets all possess their own behavioral patterns, one of the major benefits of this strategy is that you will only be searching for small price movements in your chosen direction in order to exploit the high payout rates of binary options. As you can confirm by studying the above diagram, crossovers are very often associated with the creation of new directional trends.
This feature therefore provides you with the optimum chance to activate binary options that will finish ‘in-the-money’. As such, moving average strategies perform better than many other types of strategies that are more dependent on capturing larger price movements in order to counter the impacts of noise and spreads.
Benefits of the Moving Average Strategy
Moving average strategy operate equally well with Range. Touch/No Touch and UP/DOWN binary options. Many traders have discovered that this strategy can be very effective when combined with Touch binary options. This is an exciting feature because Touch options provide very high returns from 300% upwards. However, as there is more risk involved in trading Touch binary options, you must ensure, as best as possible, that your trades possess sufficient momentum to hit your targeted levels. As the above chart demonstrates, moving average strategies are capable of identifying such trading opportunities since its crossovers are linked to extensive price movements.
However, you will need to gain experience using moving average strategies coupled with ‘Touch’ binary options in order to optimize your profits using minimum risks. Essentially, the primary secret to success is to learn how to identify the best payout ratio for each trade executed. This is because the size of the return is proportional linked to the distance between your targeted level and your opening price.
Consequently, if you select a ‘Touch’ level that is too far from your strike price. then the payout ratio will be large but so will your risks. Subsequently, there will exist a high probability that price will not progress far enough in order to hit your preselected target at least once in order for your Touch binary option to finish ‘in-the-money’. In contrast, if you choose a ‘Touch’ level too close to the opening price of your binary option, then you will have more chance of creating wins but with substantially reduced return ratios.
However, a moving average strategy definitely provides you with the ability to profit from trading the very lucrative Touch binary options. You just need to expend time and energy mastering the grey areas involved in the type of trading as just explained. When you are doing so, you should also investigate the virtues of incorporating ‘No Touch’ binary options into your strategy as well.
Introducing the Exponential Moving Average
Some traders have found that the lagging element of strategies based on the simple moving average is too restrictive. As such, they have experimented by structuring their strategies on the exponential moving average. This is because after using the simple moving average technical indicator for some time, they discovered that it is good for detecting Forex trends but does not cope very well with price surges. This is because its design stresses all price data equally the same irrespective whether it is old or new.
To respond to changing market conditions more quickly, you can use a technical indicator that that places greater emphasis on newer price data. As the Exponential Moving Average does just that, it can adapt to ever-evolving trading conditions much faster.
You will also be pleased to know that you do not need to perform any mathematical calculations when utilizing an indicator such as the EMA because your charting software will perform this task for you. As such, a number of moving average strategies have been invented based on the EMA in order to trade binary options. For example, one of the most popular is called the Exponential Moving Average Rainbow Strategy. The following diagram compares the SMA to the EMA.