The moving average can provide you with a very informative picture of an asset’s price movement. It is a technical indicator than can be of great use to binary options traders. Learn more about trading moving averages here.
In this article, Trading Moving Averages, we look at how you can calculate the moving average, and how it can help you make trustworthy binary signals.
The binary options moving average tells you what the average price of an asset has been over a time frame you choose yourself. It consists of a line that shows you the average price, and how it has changed over time, on your price chart.
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In this chart, the yellow line is the moving average:
This can help give you a much clearer picture of how the price has developed than looking at the actual price, which will show up as an incredibly squiggly line, or candlesticks that contains a lot of other (though potentially very useful) information.
For many binary traders the moving average is their preferred tool for looking at price charts. In order to calculate the moving average you define a certain amount of candlesticks. The software you use for analysis – either one you have installed on your computer or one that you access through a website online – will then do the computation accordingly.
Because you are looking at an average over time, not the current price, the moving average will not show you the current price immediately. It will respond slower, the more candlesticks you use. If you use few candlesticks, i.e. a shorter timeframe, the moving average will be more responsive.This means that the information you get – where the moving average moves on your chart – will vary greatly with how many candlesticks you use.
Every time the price of an asset nears the line that represents the moving average a binary signal is generated. The reason for this is that in most instances the price will change direction before crossing the line.
In other words, you can predict that the price will change course when it gets too close to the moving average. This prediction can be turned into a profitable binary option by investing in a 30-second option, 60-second option or simple high/low option accordingly.
A signal will also occur should the price cross the line representing the moving average. Generally speaking, this would point towards a continued movement in the direction the price was going upon crossing the moving average.
You can also use two moving averages with different timeframes at once in order to generate signals. A signal is indicated every time their lines cross. Let’s say you are using a moving average calculated using the previous 30 candlesticks and another calculated from the last 90 candlesticks. In this case the former will stay closer to the asset’s current price. When the market alters direction, it will thusly respond faster and in time cross the line drawn by the other moving average. The lower part of the illustration above shows such an occurrence.
So, if the market has been in a downtrend and starts to rise again, the moving average calculated with 30 candlesticks will respond, that is to say, rise markedly earlier than the moving average based on 90 candlesticks. As a consequence, it will cross the line representing the other moving average in an upwards direction. You will then have a bullish signal, indicating increasing prices.
This prediction can form the basis of a binary option, such as a 30-second, 60-second or high/low option. Remember to adjust the expiration date for your binary option to fit with the timeframe you operate with for you price chart.
The same mechanisms will apply in reverse for an uptrend. You will get a bearish signal when the shorter term moving average transverses the 90 candlestick downwards.