If you haven’t as yet read the following articles ‘What Exactly Is Binary Options?’ or ‘The Difference between Fundamental & Technical Analysis’ then I would recommend reading these articles beforehand if you are not familiar with the concept of Binary Options and/or technical analysis.
When it comes to trading Binary Options, undertaking your research on how a specific asset is doing (with regards to the changes in price) within the last few hours, days, etc. is vital to your success.
For if you were not to undertake any form of analysis, then the chances are that you will effectively be just a gambler.
And when it comes to undertaking our research, technical analysis and the various tools available to us through this form of analysis is what the vast majority of us Binary Options traders rely on.
Out of the hundreds of patterns and indicators which one can choose from within technical analysis, a very common indicator that is used by the majority of traders (due to its overall success rate) is the Moving Average Convergence Divergence, or MACD for short!
So how does the MACD work? Well the MACD is a trend following momentum indicator, in that as the price of an asset continuously moves up or down, the MACD adjusts itself whilst recalling the previous movements which the asset price went through.
Or to put it in layman’s terms, the MACD calculates the last movement in price which an asset undertook alongside the previous price movements the asset in question has undergone.
Fortunately to use the MACD in trading Binary Options doesn’t actually require us to know all the technical details of the MACD.
And we don’t personally need to create the MACD by hand as nowadays, most online Binary Options Platforms will have the MACD indicator built in to help you trade these options.
Yet for those of you who are interested in knowing how the MACD is created, it is essentially done by using three different exponential moving averages (EMA’s), these being a 26 day one, a 12 day one a 9 day one.
For those of you who are not aware, the reason why we have 3 different exponential average movements for the same asset is due to the fact that each EMA is not starting from the same point in time but respectively from 9 days ago, 12 days ago and 26 days ago.
When represented on the chart, the 12 day and 26 day EMA is usually plotted as a singular line, whilst the 9 day chart is shown as a dotted line which runs parallel to the main line.
The line and the dotted line generally seem to move along with each other, sometimes moving apart from one another, other times moving back towards one another.
Fortunately like operating a car, you don’t need to know everything about internal combustion in order to drive it from A to B and the same can be said for using the MACD.
For once you have brought up the MACD on whichever Binary Options platform you are using, all you need to know is how the three lines are currently interacting with each other.
And through this interaction, we are able to get an indication of how the price of said asset is going to behave in the not-too-distant future.
SO WHAT ARE WE LOOKING FOR?
When trying to interpret what the MACD is portraying, we Binary Options traders are essentially looking for three different indicators; the showing up of either one indicates to us that the price of the asset is going to behave in a particular way.
And one of the reasons for the success of the MACD is due to the fact that the price indications which the MACD gives us are more often than not correct.
So what are the three indicators which we traders look for?
One indicator which traders look for is what is known as Crossovers.
As can be seen from the chart above, whenever the dotted line (referred to as the signal line) crosses the main line, it means the price of the asset is about to head in a different direction.
To give you an example, if the signal line was above the line and crossed over to become below the line, this indicates to traders that the value of the asset is going to drop in price.
Likewise when the signal line crosses over the main line, taking it above the main line, then this indicates that the price of the asset is about to go back up in value again.
The other indicator that Binary Options traders look for is called Divergence; this is where the actual asset price suddenly breaks away from the MACD and starts moving in a different direction.
Although the MACD will soon adjust itself according to this new shift in price, for a brief while in time whilst the price of the asset is moving up or down in a direction, the MACD will still progress ahead as normally.
When this occurs, Binary Options traders are well aware that this is a signal that the price is about to dramatically move in a new direction and as such, we can place a trade as the price is likely to carry on in that direction for a little while.
The third indicator which the MACD can give traders is an Equilibrium, or dramatic shift between the short EMA line (represented as a dotted line) and the other longer EMAs, represented as a regular line.
When the two start to deviate apart from one another, this indicates to traders that the asset in question is either over-brought (if the signal line is way above the other line) or undervalued (if the signal line is way below the other line).
Usually when this occurs, the signal line (dotted line) will soon merge back to or near the other line.
Yet before this happens, Binary Options traders will have a glimpse into how the asset price is likely to behave and as such, can place their trades accordingly.
It is through looking at the MACD and in particular these three indicators that Binary Options traders have found the MACD to be a useful tool with regards to trading.
If you would like to know more useful patterns, than why not read the article Technical Trading by clicking here!