Trading indicators are a must-have in the often fast-paced nature of binary options on Quotex. These technical graphical tools form a massive part of a trader’s decision-making before they press the buy or sell button on their charting platform.
Quotex provides access to all the popular indicators. Let’s review the ten best here:
- Moving averages
- Moving average convergence divergence (MACD)
- Relative Strength Index (RSI)
- Stochastics
- Bollinger Bands®
- Fibonacci retracements
- Average True Range
- Alligator
- Average Directional Index (ADX)
- Commodity Channel Index (CCI)
1. Moving Averages
Most indicators include moving average (MA), exemplifying this tool’s significance with roots in mathematics and statistics. A moving average is a dynamic, ‘moving’ line on a chart that represents an average of certain prices within a specific period.
Their purpose is to reflect a constantly updated average price, which is the basis of the current trend. The values may be the average close, open, high, or low prices for a particular time frame.
There are many types of MAs, like the simple, exponential, linear, and smoothed moving averages. Regardless, we use them in the same way: to determine the trend. Readings above the MA indicate a bullish trend, while those below the MA imply a bearish trend. Meanwhile, a flat-appearing moving average shows a ranging or sideways market.
It’s common for traders to use two moving averages to identify trend changes (with crossovers) or to gain a better confirmation of the trend.
(Risk warning: Trading involves risks)
2. Moving Average Convergence Divergence (MACD)
The MACD is a versatile version of its predecessor, the moving average. Traders use MACD for trend and momentum trading. MACD comprises two lines, the MACD and signal lines.
- The MACD line shows the relationship between the 12 and 26-day exponential moving averages (EMA).
- On the other hand, the signal line is a 9-day EMA on a histogram with the former.
The histogram is a useful feature for displaying divergence, when there is a mismatch between the price’s high-low structure and the indicator’s.
Generally, traders generate a bullish bias when the MACD line crosses the signal line from underneath. Or, they will have a bearish bias when the MACD line crosses the signal from atop.
Finally, the zero line can also confirm trends. Readings above this line indicate bullishness, while those below indicate bearishness.
3. Relative Strength Index (RSI)
Many regard the RSI as the go-to momentum indicator. The RSI charts the ‘relative strength’ of a certain market over 14 days on a 0-100 line graph. In simple terms, it shows a market’s velocity.
The RSI reflects when the momentum is at a peak through overbought (reading above 70) and oversold (readings below 30) zones. These peaks imply that a market will most likely move further in its current direction or retrace.
Some traders use the 50 level as another reference point, where readings above it imply a bullish market while below it imply a bearish market.
The RSI is also valuable in capitalizing on divergences.
4. Stochastics
Stochastics are another popular choice for momentum traders. However, many consider it more sensitive to price changes. Regardless, this tool comprises a familiar 0-100 oscillating graph, albeit using a %K and %D line. The %K line represents how the most recent closing price has closed compared to the highest and lowest over 14 days. Meanwhile, the %D line is a 3-period moving average of %K.
As with the RSI, stochastics show divergence, along with overbought (readings above 70) and oversold (readings below 30).
The stochastics also display crossover situations. A bullish signal happens when the %K line crosses below the %D line, while a bearish signal occurs when the %D line crosses above the %K line.
5. Bollinger Bands
Traders use Bollinger Bands to identify trends and volatility. It comprises three bands, with the middle band representing a 20-day moving average. Meanwhile, the upper and lower bands are standard deviations from this centre band.
Traders observe the form to determine the trend. It’s bullish when the market is above or bearish if below the centre band. As with momentum tools, Bollinger Bands can show overbought/oversold conditions when the price exceeds the upper/lower bands.
Finally, it’s a valuable tool for demonstrating sideways markets (when the bands contract), which usually turn into breakouts.
(Risk warning: Trading involves risks)
6. Fibonacci Retracements
Fibonacci retracements fall under support and resistance indicators. However, they are technically a drawing tool consisting of flexible horizontal lines based on the Fibonacci series (1,1,2,3,5,8,13,21,34, 55, etc.). The numbers in this series have proven powerful retracement points that traders can use as entry and exit triggers in binary options.
7. Average True Range
The ATR is a non-directional volatility indicator using a 14-day moving average on a simple line chart. Despite providing no trading signals, it’s quite beneficial for traders speculating in range-based (e.g., in/out) or target-based (e.g., touch/no touch) binary options.
The ATR simply tells traders how much a market has moved in values (pips, points, ticks, etc.) within a certain time frame.
8. Alligator
The Alligator Indicator is a popular tool in binary options trading, primarily used to identify price trends and their direction. This indicator consists of three moving averages, metaphorically named after alligator body parts to represent different trend durations:
- Jaw (Blue Line): This is a 13-period Smoothed Moving Average (SMA), shifted into the future by 8 bars. It represents the long-term trend.
- Teeth (Red Line): This is an 8-period Smoothed Moving Average, shifted into the future by 5 bars. It represents the medium-term trend.
- Lips (Green Line): This is a 5-period Smoothed Moving Average, shifted into the future by 3 bars. It represents the short-term trend.
An uptrend is signaled when the Lips are above the Teeth and the Teeth above the Jaw, whereas a downtrend is indicated when the Lips are below the Teeth and the Teeth below the Jaw.
9. Average Directional Index (ADX)
The ADX is a non-directional trend-measuring oscillator. It provides different trend measurements according to its placement on a 0-100 line with a smoothed 14-day moving average.
Below is a cheat sheet to understand the various ADX readings:
- ADX below 20: non-trending market
- ADX crosses above 20: emerging new trend
- ADX between 20 and 40: confirmation of an emerging trend
- ADX above 40: strong trend
- ADX crosses 50: extremely strong trend
- ADX crosses 70 (rare occurrence): ‘power trend’
10. Commodity Channel Index (CCI)
The Commodity Channel Index (CCI) oscillates between +100 and -100. It helps traders identify deviations from an asset’s average price, indicating potential reversals. Readings above +100 suggest a bullish trend, while those below -100 indicate a bearish trend.
Traders find the CCI particularly useful for analyzing currencies and equities, as it provides insights into overbought or oversold conditions, aiding in timely trading decisions.
Pros And Cons of Indicators Trading
The first advantage is that indicators are easily available with many binary options trading platforms outside of Quotex. Secondly, indicators present complex information in a simpler way than using price action or doing manual calculations.
Sadly, there are two downsides with indicators. The first is that these are lagging tools, meaning that they provide a trading trigger after the optimal opportunity has passed. In simple words, indicators only show you what’s already happened given that they only consider historical data.
Another challenge is that indicators can not provide reliable trading signals on their own. This is a mistake which many traders commit. An indicator is necessary to provide useful information in one’s trading strategy but there should be other confirmation factors.
How to Apply An Indicator on Quotex
Let’s briefly go through the steps to apply an indicator on Quotex:
- Log into your Quotex account to access the charting platform.
- Open any chart
- Head to the first icon down at the bottom left of your screen.
- This brings up the indicator list. Clicking on any indicator brings it up on your current chart.
It’s worth noting that you should make the necessary settings for the indicator before placing it. Alternatively, you’ll have to remove it (by clicking on the cross or X icon on the chart) and begin the whole adding process again.
How to Create A Strategy With Indicators
Indicator types
The first consideration is understanding the type of indicator. We classify these tools based on trend, momentum, volatility, volume, and support and resistance. No concept is necessarily more prominent than another. However, a trader will use discretion to decide the most significant for their goals and strategy.
Some traders can build a trading system using an individual trend indicator like moving averages without considering other factors. Meanwhile, another group may disregard MAs and create purely momentum-based strategies.
It’s worth noting that you can utilise two or more indicator types simultaneously. Yet, you will likely face analysis paralysis or mixed trading signals. Generally, the best traders derive their bias to go long or short from a primary indicator and use what they may regard as a secondary indicator to refine their entries (more on this later).
For example, a trader could use a 10-day moving average (MA) to determine trend direction. If the asset’s price is above the 10-day MA, the trend is bullish and the trader will consider call options. If the price is below the 10-day moving average (MA), the trend is bearish and the trader will consider put options.
To refine entries, the trader uses the Relative Strength Index (RSI). An RSI above 70 indicates overbought conditions and an RSI below 30 indicates oversold conditions.
Even with an upward trend indicated by the 10-day MA, a high RSI suggests a potential pullback. The trader could wait for the RSI to fall below 70 before entering a call option, thus combining trend direction with precise timing.
(Risk warning: Trading involves risks)
Type of Market Condition
The next consideration is the market conditions to exploit: trends, reversals, range, breakouts? While many analysts believe trends are the easiest, the price doesn’t always trend. So, you will either participate in one type of condition or have another strategy that capitalises on another scenario.
Ultimately, strategy-building means recognising the different conditions a market may be in at any given time and deciding whether it’s worth capitalising on.
Creating A Trade Set-Up & Trading Plan
So, now you have your preferred indicator and trading condition. The next and arguably most difficult part is having a set-up. A set-up consists of the ideal charting scenario where certain triggers have occurred simultaneously.
For instance, a moving average trader may look for:
- The price being above or below the MA to confirm the trend
- A price action pattern on the moving average that indicates trend continuation
- A market which is on a key support level or Fibonacci retracement level
Their final trigger to take this trade could be a moving average crossover.
Unsurprisingly, creating a perfect set-up is impossible since you will lose some trades even with the highest conviction. Yet, the aim is to take only the most informed positions where quality precedes quality.
It’s around this stage when traders should also create a trading plan. The trading plan should begin around the time of finding the best set-up. Such a plan encompasses much more than your strategy. Factors to include (but not limited to):
- Trade management
- The markets you will trade
- Types of binary options you will trade
- Amount risked per trade
- Best trading times
- Trading restrictions (if any)
Practicing
A frequently repeated mistake by traders is not enough practice. It’s easy to spend little time on a demo account and want to trade on a live account immediately. Sadly, this comes with financial risk. Meanwhile, spending ample time on a demo account allows you to experiment without losing money.
The best trading strategies have been reiterated almost endlessly on a demo account before traders use them on a real account. While too much refining is possible, the point is to practice for at least a year.
It’s at this stage that one gathers a track record that will determine whether their strategy is profitable before trading live.
In summary, here are the steps to follow when creating an indicator-based strategy:
- Determine the most crucial trading aspect to exploit (trend, momentum, volatility, volume, and support and resistance).
- Determine whether you will trade trends, reversals, range, or breakouts.
- Create an ideal trade setup and trading plan.
- Practice, practice, practice, and gather a sufficient profitable track record before trading live.
(Risk warning: Trading involves risks)
Conclusion
Quotex houses all the familiar indicators within the binary options trading world that are easy to apply and customise. Yet, it’s more crucial to understand the capabilities of these tools and how they can help you.
Creating any strategy using indicators takes work, time, and dedication. So, be patient during your building stage and gather enough confidence to tackle the markets on Quotex.
