The three moving averages crossover technique is a sophisticated binary options trading strategy that can make you money in any trading environment. While classic strategies only work in a specific market environment, the three moving averages crossover technique is one of the very few strategies that you can use in any situation.
By combining three moving averages to create a signal, the strategy eliminates faulty signals before you lose money with them and employs a self-correcting element. It is, therefore, highly attractive for all types of traders.
To help you understand and apply the three moving averages crossover technique, we will start by explaining what moving averages are and how you can use them for your trading and then see how you can combine three moving averages to create a powerful, sophisticated strategy.
In detail, we will take a look at these questions:
- What are moving averages?
- How can moving averages predict future price movements?
- Which types of moving averages exist?
- Difficulties in using moving averages for trading
- How the three moving averages crossover strategy can solve all your problem
- Which binary options types should I use to trade the three moving averages crossover technique?
If you already know some of these points, feel free to jump ahead to the point that interest you the most.
What are moving averages?
Moving averages are technical indicators that can help you predict future market movements. On first sight, moving averages look like long, winding lines that are drawn on your price chart. The direction of this line and its relation to the current market price can tell you a lot about which direction to invest in.
To create this line, a moving average calculates the average price of the asset you are looking at over a given time. For example, if you use a daily moving average for an asset that has been trading at $100 yesterday, at $99 the day before that, and at $98 the day before that, a moving average based on the last three days would today have a value of $99.
For yesterday, the moving average would repeat the same process, but skip one day into the past. It would use the values of the three days before yesterday. Let’s assume that the result of these three days is $98. The moving average would draw this result into your price chart by connecting today’s value of $99 with yesterday’s value of $98.
By repeating this process for every day in your chart and connecting the prices, the moving average will create one long line that can provide you with a lot of information about the market.
You can adjust the moving average to your needs by varying the number and the length of the periods that you use for its calculation. Instead of three days, you could use 10 hours, for example. In this case, the moving average would calculate the average price for the past 10 hours and draw it into your price diagram. It would then go one hour into the past and repeat the process, and so one.
The result would be a different line as we had seen it in our example with a daily moving average. It would focus on a narrower price range, which would be ideal if you want to make short term predictions. As a rule of thumb, shorter periods will lead to a moving average that makes short-term predictions. In other words, a moving average based on a daily price is ideal for long-term predictions, a moving average with based on a 15 minutes price is ideal for short term predictions, and a moving average based on an hourly price is somewhere in between.
How can moving averages predict future price movements?
Moving averages are a great tool to understand what is happening in the market and what will happen next. On first sight, moving averages do not do a lot – they calculate the average prices and connect them to one line. On second sight, however, this line can help you uncover some essential truth about the market.
Every moving average has two features that tell you a lot about the current market environment: direction and position relative to the current market price. Let’s look at both of these features individually.
1. Direction
A moving average can rise or fall. If the last average price was at $100 and the average price before that at $99, you know that the market is currently creating higher prices. For traders who think about which direction to invest in, this is an important indication. Apparently, investing in rising prices would be the better call right now.
A change in direction can be even more significant. If the moving average fell over the last periods and now starts to rise, the market apparently has turned around. This important realization can help you adjust your trading strategy to the current market environment and avoid bad investment decisions.
The number of direction changes can be significant, too. In a market that has risen continually over the last time, you can assume that it will continue to move in long swings, but in a market that has changed direction more often, you should expect new swings at any time.
Finally, the speed at which the market rises or falls can tell you a lot about which type of binary options you should use for your investments. In a market that barely rises or falls, you know that this is the time for cautious predictions with high / low options instead of going for big payouts with one touch options. Vice versa, a quickly rising or falling moving average can point you towards a market for one touch options and big gains.
2. Position relative to the current market price
Whether the current market price is higher or lower than your moving average can tell you a lot about whether the market is rising or falling. If the moving average is pointing upwards and the market is trading above the moving average, you know that the upwards movement is still intact and strong. If the market falls below the moving average, this is the first sign of a weakening uptrend, even if the moving average has not turned around yet.
Similarly, in an active downtrend, the market will be below the moving average. As soon as the market crosses the moving average upwards, you should probably stop investing in the downtrend and move on to another asset with an intact trend.
Which types of moving averages are there?
We already explained that you could use a moving average based on different time periods. There is, however, an even more important distinction between moving averages: the amount of periods they take into account.
A moving average can be based on any number of periods from two upwards. Depending on how many periods you use, your moving average will have fundamentally different characteristics.
A moving average that is based on only two periods will always stay close to the market price. When the market changes direction, your moving average will be quick to follow. A strategy that creates signals based on such a short moving average creates many signals, but many of these signals are of a lesser quality. The moving average reacts to every little market movement and is unable to filter out small price fluctuations that mean nothing.
Consequently, the strategy will possess a high earnings potential but also bear considerable risk. By making many trades, you can make a lot of money – if you are able to win a high enough percentage of your trades. Whether you should take this risk depends on your personality and the risk you are willing to take.
On the other hand, you could also use a moving average based on 500 periods. Such a moving average would be slow to react to changes in market direction, but when it reacts, the odds are that the change was created by a significant change in market movements. Of course, such a strategy would create significantly fewer signals.
Consequently, designing your moving average requires you to find your individually right combination of risk and trade frequency. The three moving averages crossover technique can solve this dilemma. To understand why and how let’s look at the disadvantages and problems of using moving averages and then show how the three moving averages crossover technique can solve them.
Difficulties in using moving averages for trading
Moving averages are great tools, but they are not without problems. One of the most significant problems comes during sideways movements. When the market changes direction often and quickly, the moving average will eventually catch up with the market and follow its erratic changes of direction.
If your strategy is to invest in every direction change in your moving average, you will make many investments during this period. Since the market is moving up and down unpredictably, however, you will lose many of them and make a loss.
This is the basic dilemma of moving averages: as long as the market is in a trend, they work great. They can help you identify the right direction to invest in and win a binary option. As soon as the market is no longer trending and enters a sideways movement, however, moving averages lose their predictive powers. Now they will get you into many losing trades and cost you money.
The key to making money with moving averages is to know when you can trust them and when you can’t. For binary options traders, this is a dilemma. The whole point of using technical indicators for your trading is to make your market analysis quicker and simpler. Double-checking your moving averages would consume so much of your time that it makes no sense to employ such a strategy.
Some traders tried to solve this problem by combining two moving averages. They would use a fast moving average based on few periods and a slow moving average with many periods. The fast moving average follows the market more closely than the slow moving average, which allows for two kinds of insights:
- The position of the fast moving average in relation to the slow moving average indicates whether the market is trending up or down. When the fast moving average is above the slow moving average, the market is in an uptrend. When the fast moving average is below the slow moving average, the market is in a downtrend.
- When the fast moving average crosses the slow moving average, the market has changed direction. If the cross is in an upwards direction, the market has turned upwards. If the cross is in a downwards direction, the market has turned downwards.
This strategy has the advantage of eliminating some of the false signals a single moving average would create. Because you use two moving averages, quick changes of direction do not create a signal. This, however, solves only half of your problems. During a true medium to long sideways movement, both moving averages will still converge and cross each other repeatedly, creating false signals that lead to losing trades.
To fix this problem once and for all and create a trustworthy, always applicable trading strategy, binary options traders created the three moving averages crossover technique. Let’s see what this technique can do for you.
How the three moving averages crossover technique can solve your problems
The three moving averages crossover technique expands the classic technique by adding a third moving average. Each moving average uses a different number of periods, thereby creating a slow, a fast, and a medium moving average.
To create a signal, you want both of the faster moving averages to cross the slower moving average to the same side. There are three ways you can trade these signals:
- Trading the relation of fast moving averages to slow moving average: One simple way to trade the three moving averages crossover technique is to invest in the direction both of the faster moving averages indicate. If both faster moving averages are above the slower moving average, you invest in rising prices; if both faster moving averages are below the slower moving average, you invest in falling prices. If both fast moving averages are to different sides of the slow moving averages, the market is in a sideways movement, and you do not invest.
- Trading the crossover: Another simple strategy is to trade the crossover between the faster and the slower moving averages. For this technique, you wait until both of the faster moving averages are to different sides of the slower moving average. As soon as one of the faster moving averages crosses to the side of the other, you invest in the direction of this cross. While this strategy will create fewer signals than simply trading the relation, the idea is that you catch new movements right when they start and increase your winning percentage.
Both strategies can work equally well for you. Choose the one you feel more comfortable with, or combine both.
For example, you could use the popular 5-period, 10-period, and 20-period moving averages. In this case, a buy signal would be created when both the 5-period and the 10-period moving averages cross the 20-period moving average from bottom to top. Conversely, a sell signal would be created when both the 5-period and the 10-period moving averages cross the 20-period moving average from top to bottom.
When the market is not trending, the 5-period and the 10-period moving averages are likely on different sides of the 20-period moving average, preventing a signal from being created.
This system has two advantages:
- The conventional model with two moving averages generates a signal every single time both moving averages cross. During a sideways movement, this is a recipe for disaster, as both moving averages constantly cross without generating the price movement you would need to win a binary option. Using a third moving average to confirm the signal of the first two moving averages will greatly increase your percentage of winning trades, and thereby greatly increase your profits.
- The three moving averages crossover technique allows you to keep your periods low but still create valid signals, thereby combining the advantages of moving averages with many periods and moving averages with few periods. Compared to using only a 20-period and a 10-period moving average, adding a third 5-period moving average can eliminate many false signals without sacrificing the system’s quickness to create signals.
These two advantages make the three moving averages crossover technique to a great tool for every trader. Of course, you will still lose some trades, but you can rarely get a better combination of many trading signals and a high winning percentage than with the three moving averages crossover technique.
Which binary options types should I use to trade the three moving averages crossover technique?
We generally recommend trading the three moving averages crossover technique with high / low options. The technique only predicts whether the market will rise or fall but says nothing about the strength of the movement, which is why you should stay away from binary options types that require this information, for example one touch options.
If you want to use one touch options anyway, you have to combine the three moving averages crossover technique with another indicator that allows you to predict the reach of the movement, for example a momentum indicator.
For now, let’s focus on high / low options, since this is the more common strategy.
To choose your expiry for your high / low option, you have to consider two things:
- You want to give the market enough time to develop the movement you are predicting. When you choose your expiry too short, normal market swings might cause you to lose your option despite an accurate prediction.
- You want to keep your prediction short enough to be still valid. Any prediction based on moving averages loses its validity eventually. When your longest moving average looks at market movements of one hour in total, you can’t expect its predictions to be valid for multiple days.
To avoid both of these problems, you have to choose your expiry in a way that fits the moving averages you are using. As a rule of thumb, you can use high / low options with an expiry equal to about half the time your fastest moving average uses for its calculation. If the moving average uses 5 periods of 15 minutes, for example, it will look at a total time 75 minutes. Your ideal expiry would be 35 to 40 minutes, but you can also use a 30 minute or a 45-minute expiry if these times work better for you. We recommend you try a few different options and see which of them works best for you.
Should you decide to trade your prediction with one touch options, you always choose the longest expiry that is within the reach of the movement you expect.
This is all the information you need to trade the three moving averages crossover technique with binary options. Choose the way in which you want to trade, define you expiry, and you are ready to go.
Conclusion
The three moving averages crossover technique can create many high-quality signals. Since most other strategies either create few high-quality signals or many low-quality signals, the three moving averages crossover strategy offers a unique combination of quality and quantity that only a few other strategies can match.
If you want to trade the three moving averages crossover technique now, we recommend you pick a broker from our top list and get started with binary options!