Moving Average Convergence Divergence

The MACD, the Moving Average Convergence Divergence, is an important indicator in technical analysis. It can be used to generate buy or sell signals, and to evaluate the momentum of a trend.

Moving Average Convergence Divergence

Most commonly, the MACD is calculated with a 12-day and a 26-day exponential, smoothed moving average. The 26-day moving average is subtracted from the 12-day moving average, which generates the first line for the MACD. In the picture above, this is the blue line. As you can see the blue line moves faster and stays closer to the stock’s price than the red line.

The red line is a 9-day average of the blue line. It therefore is slower to react to price movements, and moves in straighter, less erratic line.

Continue reading the article on Moving Average Convergence Divergence below the table…

How to trade the Moving Average Convergence Divergence with binary options

In theory, the MACD generates the following signals:

  • Buy – When the fast line crosses the slow line from bottom to top.
  • Sell – When the fast line crosses the slow line from top to bottom.

As a trader, you can trade these signals with binary options.

For traders prepared to take risk, a strategy based solely on MACD signals might be suitable. In this case, you could trade any selling or buying signal with High/Low options, for example. To apply a strategy like this, make sure to choose the expiration time for your options according to your chart’s time frame. Otherwise, signals might be invalid by the time your options expires or will not have had enough time to create the movement you have invested in. This, as any trading skill, can only be learned through experience.

Risk-averse traders, however, should not use the MACD alone, as it will generate too many false signals. They can combine the MACD with other indicators, trend analysis, or candlesticks.

Trading the momentum with the MACD

Another way to use the MACD is to judge the momentum a trend has left. One rule, for example, derived from the MACD could be to only invest in the direction the MACD is indicating:

When the faster line is on top of the slower line, only invest in rising prices. When the faster line is below the slower line, only invest in falling prices. In this case, you would be using the MACD to make your strategy more secure and reduce the number of losing trades. On the other hand, this would make your strategy create fewer signals, thereby reducing your chance to make a lot of money quickly.

With a use like this, the MACD becomes similar to the RSI, the Relative Strength Index. Both indicators can be used to evaluate a trend’s momentum; some traders even combine them to generate an especially high percentage of winning investments. Which indicator you want to use, or if you want to use both, should entirely depend on which signal you feel most comfortable with. There is no better or worse indicator.

Your success will depend on how well you interpret the signals.

The MACD can be used in charts with any time frame, but works best in a daily chart. In general, the bigger the time frame, the more valid the MACD’s signals become. You can use the MACD with an hourly chart, for example, but the more erratic price movements on smaller timescales will generate a higher number of false signals. Therefore, you should be extremely careful to use the MACD with 30 or 60 Seconds options.

More about Moving Averages

If you want to learn more about the use of moving averages in binary options, we recommend you to read the following:

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