The Moving Average Convergence/Divergence (MACD) indicator is one of the most popular technical tools for short term traders, but it’s necessary to know how to interpret it correctly if you are going to create profits while using it. First, begin by looking at the lines on the chart that the MACD tool uses to begin with. A MACD line is created by combining two different exponential moving averages and creating a line on a chart. The ranges will vary and they are considered to be a measure of momentum. When a second signal line is imposed on the MACD chart, the potential for MACD crossovers is created.
Application to this Method
When using the MACD, having a clear idea of what a crossover is, and how it signals an entry point is a must. To be clear, the crossover point occurs where the MACD line and the signal line cross paths. There are two types of crossovers: bullish and bearish. When the MACD line crosses the signal line starting below it, and ending above it, this is a bullish move and indicates that prices are moving upward. If the line starts above, and ends below, this is a bearish move and indicates that prices are moving downward. When a signal is bullish, go with a call option. When bearish, go with a put option.
The shorter the timeframe you are focusing on, the smaller you will want the two different moving average lengths to be. Many traders use a 12 and a 26 day exponential moving average. The signal line is a 9 day line. This can be customized as needed, and this can be tricky, so it’s best to practice quite a bit with this trading strategy before you roll it out in real time. The 12, 26, 9 day strategy is typically effective for trades that are open for an hour or more. Less than this, and you are just guessing.
One easy way to gain an edge when using the MACD crossover strategy is to use it in conjunction with a candlestick chart, so you will want to be sure that your charting package allows you to do this. When you use a candlestick charting methodology, you can more easily visualize what the asset you are looking at is doing in real time. Just looking at two lines doesn’t give you a feel for the little things that go on in the minute by minute, hour by hour timeframe, but the candlestick chart on top of the MACD and signal lines will give you this info. Once you become familiar with the different candlestick signals, you will be gaining a second way to verify whether or not a trade is a good idea or not. They are both technical indicators, but two tests for trade validity that agree are better than just one test that has not been confirmed.
The MACD crossover trading strategy can be used for any type of asset. It measures momentum, but when coupled with the price monitoring of the candlestick chart, you can pair price and momentum and get a fairly accurate measure of the future.
Look at the X Factors
Although it’s a strong tool, the MACD is not as effective on its own as most traders give it credit for. The crossover strategy described here is a good one, but it’s most effective in neutral fundamental and sentimental environments, and only if the moving average lengths selected accurately extrapolate into the timeframes for the binary option expiries you will be handling. Looking at the standard 50 and 200 day moving averages, for example, will not be helpful at all if you are trading 60 second binary options. You will want to refine your approach in order to fine tune it as you go forward.
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