The MACD binary options trading strategy uses the Moving Average Convergence Divergence indicator to measure market momentum and potential changes in price direction. In this article, we will explain the strategy in detail, show you what to look out for and how to incorporate it into your trading as effectively as possible.
Good to know:
- The MACD indicator uses two exponential moving averages (EMAs) to measure market momentum and potential price direction changes.
- It consists of three components: the MACD line (difference between 12-day and 26-day EMAs), the signal line (9-day EMA of the MACD line), and the histogram (difference between the MACD line and the signal line).
- Traders can use MACD for various strategies, such as identifying bullish or bearish crossovers, zero line crossovers, and divergences that signal potential trend reversals.
- While MACD is a popular and versatile indicator, it has limitations, including the potential for false positives and not predicting all reversals, and it should be used in conjunction with other indicators for more accurate analysis.
What is MACD Indicator?
The MACD is an excellent indicator that measures the relationship between two exponential moving averages (EMAs). This technical indicator was developed by Gerald Appel in the 1970s. It is a useful indicator that helps to quickly determine the short-term trend direction and helps to identify trend reversals. This means that you can find better trading opportunities by using the MACD indicator.
Here are some details about the indicator:
- The data generated is displayed using three lines: the MACD line (blue line), the signal line (red line) and a histogram (green).
- The MACD line is the result of the difference between two leveled moving averages. The difference is calculated in 12 days (fast) and 26 days (slow). Similarly, the signal is a 9-day exponential average of the MACD line. The histogram is the result of the MACD minus the signal line.
- The MACD histogram will increase when the asset is moving strongly in a particular direction. However, if the histogram starts to shrink, you can conclude that there will be a price reversal.
As the MACD line moves in and out around the zero line, it resembles the characteristics of an oscillator. You can see this indicator on the chart as two lines that oscillate without limits. Furthermore, you can analyse the data to make a trade using this indicator.
The MACD is a great indicator that can be interpreted in many different ways. But fast rise/fall, convergence and divergence are some standard methods.
(Risk warning: Your capital can be at risk)
Interpretation of the MACD
The name Moving Average Convergence Divergence says it all. This indicator is a quick way of identifying periods when the trends in the market are either converging or diverging.
When the price of the asset moves in the same direction as the underlying asset, it shows convergence. On the other hand, if the price moves in a different direction, it indicates divergence.
If the short-term EMA is above the long-term indicator, there is divergence. On the other hand, if the EMA and the indicator move together, it is a convergence. In addition, a MACD above or below zero also indicates something important.
- In a bullish sign, the MACD indicator is above zero. In this case, the short-term EMA is moving away from the long-term moving average in an upward direction.
- On the other hand, in a bearish sign, the MACD is below zero. That means the short-term EMA is diverging away from the long-term moving average in a downward direction.
By including signal line and histogram, you can also conclude a few more things. Like if the histogram is positive, that indicates MACD is below the 9-period moving average. In short, MACD is traveling in the same direction. But if the MACD is above the moving average, that means the MACD is going in the opposite direction.
How Moving Average Convergence Divergence works?
Here’s a quick overview of how the MACD indicator works:
- In a bearish situation, the MACD will turn down from above zero. Similarly, the opposite happens in a bullish situation.
- Furthermore, if the MACD line crosses the signal line from below to above, the indicator is considered bullish. In this case, if the MACD line is below the zero line, it’s a strong signal.
- Similarly, the indicator is bearish when the MACD line crosses from above to below. In this case, if it’s above the zero line, it’s considered a strong signal.
- When trading, if the MACD is whipsawing, you should not trade. That’s because such a situation shows that the market is volatile. Also, it will be difficult to accurately predict the market’s movement, which will result in a loss.
MACD Indicator for 60 seconds trading
You can make short trades like 60 seconds trading by using the Moving Average Convergence Divergence indicator.
To start the process, you can change the MACD setting. The default configuration is MACD periods (9), short term (12) and long term (26). You should change this setting to long-term (20), short-term (9) and MACD period (3).
In addition, set the MACD main line as a line and the signal line as white. There are a few conditions you need to know in order to make the right trading decisions.
If you want to buy a call option:
- To make a successful trading, the red line, i.e., the MACD main line, must cross the white line, i.e., the MACD signal line from below to above.
- Also, there should be a candlestick above the cross spot in the direction of the MACD mainline. It’s a bull trend bar.
If you want to buy a put option:
- In this situation, the red line should cross the white line from above to below.
- Also, there should be a candlestick above the cross spot in the direction of the MACD mainline. It’s a bear trend bar.
You can enter and win huge profitability from the trade if the market meets any of these conditions.
Best Binary Options MACD Strategies
Here are a few strategies that you can use to trade with the MACD indicator:
MACD 0 Line Crossover
When the MACD line goes from positive to negative, the MACD 0 line crossover occurs. Loosely translated, this means that the asset is moving from positive momentum to negative momentum or vice versa.
In this case, when the MACD line crosses from negative to positive, it’s considered a bullish sign. This is called a bullish crossover. Similarly, when the line crosses from positive to negative, it’s a bearish sign, or a bearish crossover.
One thing to remember is that a crossover does not always mean that the momentum has changed. For example, if there is a trading situation where the MACD line is close to 0 for some time, it indicates that the momentum is low.
MACD Signal Crossover
To apply this trading strategy, you should observe the MACD line and the signal line.
A bullish crossover occurs when the MACD line is below the signal line. It also indicates that the momentum is about to turn in the opposite direction. Similarly, a bullish crossover occurs when the MACD line crosses above the signal line.
If you want to trade the MACD indicator using high/low options, enter a call option for a bullish crossover. Similarly, enter a put option for a bearish crossover.
MACD Momentum Divergence
If the actual movement of the price is different from what the MACD is predicting, then a MACD divergence occurs. When you see this, you can conclude that the momentum is about to decrease.
In this situation, if you want to place a trade, you should wait for the divergence between the underlying price and the MACD indicator. Divergence can be further divided into two categories, bullish divergence and bearish divergence.
In a bullish divergence, the price of a commodity is moving lower, but the MACD indicator is showing a higher low. Similarly, a bearish divergence occurs when the price of the commodity is making higher highs, but the indicator is making lower highs.
MACD + Relative Vigor Index
The Relative Vigor Index is an indicator that compares the price range of a security with its closing price. You can use this indicator to understand the overbought and oversold situations in the market. You can also use the MACD indicator to compare crossovers.
If both indicators show a crossover in the same direction, you can buy or sell the asset. You can also wait until the MACD gives a signal to close the trade.
MACD + Money Flow Index
As compared to the Relative Vigor Index, Money Flow Index generates less limited buy and sell signals. That’s because this indicator requires volume and price movement to calculate readings.
To use this strategy, you should combine oversold/overbought signals of the money flow index with the crossover of MACD stock. Here, you can expect two outcomes.
- If the money flow index shows overbought, you are supposed to wait for the bearish cross. If this happens, it shows a short signal.
- If the index shows oversold, you should wait for the bullish cross.
You can trade your position if the MACD breaks the trigger line in a different direction.
MACD Indicator and Bollinger Band trading strategy
You can create one of the best and most reliable trading strategies by combining MACD indicator and Bollinger Band trading. This combination trading indicator is generally used for 60 seconds options trading.
Since this strategy is easy to execute, it’s generally used by new traders. Also, you can use this strategy to trade in any direction by reducing the risk.
But if you are not comfortable with 60 seconds trading, you should avoid using this strategy because it’s entirely dependent on the 60 seconds binary options. Additionally, it’s difficult to identify trends.
MACD Indicator for Day Trading
If you are an active day trader, using the MACD indicator will be helpful because it’s effective and can be based on any time frame.
While using MACD for day trading, you should check the level of volatility of different assets. That’s because if the volatility is more, the less likely indicator can predict the price movement.
Also, if you are wondering what the best time frame to use the MACD indicator is, there is no best time frame. So, depending on the instrument, asset, and type of trade, you can pick a time frame that can work for you in the best way.
Advantages of MACD Indicator
Here are a few advantages that show why you should use this indicator:
- The best thing about the MACD indicator is that it can be used as a momentum indicator and a trend indicator.
- It gives clear buy and sell signals.
- Lastly, the MACD indicator can easily be combined with other indicators to generate a clear and accurate result.
(Risk warning: Your capital can be at risk)
Limitations with MACD Indicator
Although the MACD indicator is helpful and has multiple advantages, it also has certain limitations:
- For starters, you will notice that the divergence usually signals a possible reversal. But in reality, there is no reversal. Thus, MACD produces false positives.
- Additionally, divergence doesn’t predict all the reversals. That happens because divergence speculates too many reversals that don’t occur.
- Lastly, it does not give a correct analysis of trend lines.
Where can you use MACD Indicator?
If you want to make profitable trades using the MACD indicator, you should choose one of the best brokers for the job. When looking for a broker, don’t forget to check the minimum deposit amount, the minimum trading amount, the availability of demo accounts and other important aspects.
You should also try to choose a trading platform that is regulated by a trusted authority. That way, you’re less likely to lose money. Some popular brokers include eToro, Fortrade, Skilling, Pepperstone, easyMarkets and Libertex.
MACD vs. RSI
Although the basics of Moving Average Convergence Divergence and Relative Strength Index sound the same, they are different.
The RSI shows how overbought and oversold the market is compared to recent price levels. It also measures the change in price from recent highs and lows.
The Moving Average Convergence Divergence shows the relationship between two EMAs. You can use these indicators together to get better results.
Conclusion: The MACD strategy involves using one of the best indicators
In conclusion, the MACD, or Moving Average Convergence Divergence, is an excellent indicator. Although it can be a little daunting to understand the basics of this indicator at first, once you learn what convergence and divergence are, you can use them to increase your profitability.
When using this indicator, it’s also important to remember its limitations and trade accordingly. You must also look for ways to be successful within the limits. Finally, you can use the right MACD trading strategy to make a winning trade.
(Risk warning: Your capital can be at risk)
Frequently Asked Questions:
What is the MACD indicator in a binary options trading strategy?
The MACD (Moving Average Convergence Divergence) consists of the MACD line (difference between the 12-day and 26-day EMAs), the signal line (9-day EMA of the MACD line), and a histogram (difference between the MACD line and the signal line). Within a binary options trading strategy, it helps to identify trend direction, momentum, and potential reversals.
How do you interpret the MACD indicator within a binary options trading strategy?
In a binary options trading strategy, the MACD indicator is interpreted by analysing its three components. When the MACD line crosses above the signal line, it’s a bullish signal (buy) and when it crosses below it, it’s a bearish signal (sell). A positive histogram indicates upward momentum, while a negative histogram indicates downward momentum. A divergence between the MACD and the price action can signal potential trend reversals.
What are the limitations of the MACD indicator in a binary options trading strategy?
In a binary options trading strategy, the limitations of the MACD include the potential for false positives, as a divergence may signal a reversal that doesn’t occur. It may also not predict all reversals and may be less effective in highly volatile markets. It’s recommended to use the MACD in conjunction with other indicators for more accurate analysis.
Can MACD be used for short term trading like 60 second options in a binary options trading strategy?
Yes, in a binary options trading strategy, the MACD can be adapted for short-term trading such as 60-second options by changing its settings (e.g. long-term EMA to 20, short-term EMA to 9 and MACD period to 3). Traders look for the MACD line to cross the signal line in the desired direction and confirm this with the price action before placing a trade.
