As a trader of binary options, you have to predict future price movements of an asset. Besides candlesticks, there are a number of technical indicators that can help you make successful predictions. A technical indicator is a mostly computer calculated data set a trader can use to come to predictions about the future direction of the market. One of the most popular technical indicators is the moving average. Learn about trading moving averages here, and improve your profit.
Trading Moving Averages – how is it done?
To calculate the moving average, you have to define a number of candlesticks (n). Your computer or your signal provider will calculate the average price for the previous n candlesticks, and draw it into your price chart. It will then repeat the process for each of the candlesticks in your chart, always using the last n candlestick before the respective candlestick.
Continue reading the article on trading moving averages below the table…
The resulting points will be connected, and form a line. In the chart below, this is the yellow line.
In its most basic form of use, the moving average creates a signal every time the price approaches its line. Most of the time, the price will turn around before it crosses the line, as you can see in the picture above. You can trade this prediction with binary options, for example a High/Low option or a 30 or 60 Seconds option.
Another signal is created when prices cross the line created by the moving average. In general, this indicates a further movement in the direction the price crossed the moving average.
You can trade this prediction in the same way as the price bouncing off the line.
Depending on how many candlesticks you chose to include in the calculation of your moving average, results will vary widely. In general, the more candlesticks you use, the slower the moving average will react, the further away it will be from the current price, and the fewer signals it will create.
The fewer candlesticks you use, the more agile the moving average will be and the more signals it will create. The quality of the signals, however, will be better the more candlesticks you use. In other words: If you want to have especially valid signals, you will have fewer signals than if you are willing to accept a few false signals. Very popular are moving averages based on 14, 50, 100, or 200 candlesticks, for example.
Using two moving averages to create trading signals
By using two moving averages at the same time, you can create a trading signal every time the moving averages cross lines. If you are using a moving average calculated from the last 90 candlesticks and another moving average calculated from the last 30 candlesticks, the shorter moving average will stay closer to the price. Once the market changes the direction, it will therefore change direction more quickly and eventually cross the line of the longer moving average. You can see this example in the lower part of the picture above.
When the market will start to rise after a downtrend, for example, the moving average calculated from 30 candlesticks will start to rise long before the moving average calculated from 90 candlesticks. Therefore, it will eventually cross its line upwards. This is a bullish signal, predicting rising prices.
You can trade this prediction with a High/Low option, or a 30/60 Seconds option. Make sure to choose an expiration date matching the time frame of your chart.
In an uptrend, roles are reversed. A bearish signal is created when the shorter moving averages crosses the longer moving average downwards.
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: