The MACD binary options trading strategy relies on the Moving Average Convergence Divergence indicator to gauge market momentum and identify potential price direction changes. This guide explains the strategy in detail, highlighting key signals to watch for. You’ll also learn how to integrate it effectively into your trading approach.
Key Facts About the MACD Indicator:
- 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 the inability to predict all reversals. It should be used in conjunction with other indicators for more accurate analysis
What is the MACD Indicator?
The MACD is an excellent technical indicator that measures the relationship between two exponential moving averages (EMAs). Gerald Appel developed it in the 1970s. It is useful for quickly determining the short-term trend direction and identifying trend reversals, which means that you can find better trading opportunities by using it.
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 line)
- 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. This indicator is seen on the chart as two lines that oscillate without limits. Furthermore, using this indicator, you can analyze the data to make a trade. The MACD is a great indicator that can be interpreted in many different ways. Fast rise/fall, convergence, and divergence are some standard methods.
How to interpret the MACD indicator?
The name Moving Average Convergence Divergence says it all. This indicator quickly identifies periods when market trends 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.
- The MACD indicator is above zero, a bullish sign. In this case, the short-term EMA is moving upward away from the long-term moving average
- 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 the signal line and histogram, you can also conclude a few more things. If the histogram is positive, that indicates MACD is below the 9-period moving average. In short, MACD is traveling in the same direction. However, if the MACD is above the moving average, it is going in the opposite direction.
How Does Moving Average Convergence Divergence Work?
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, the indicator is considered bullish if the MACD line crosses the signal line from below to above. 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
- If the MACD is whipsawing, you should not trade. 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-second trading 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, the MACD main line is set as a line, and the signal line is set 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, ex: 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, and 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, and 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 moves from positive to negative momentum or vice versa.
In this case, when the MACD line crosses from negative to positive, it’s considered a bullish sign—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, a trading situation in which the MACD line has been close to 0 for some time indicates that the momentum is low.
MACD Signal Crossover
To apply this trading strategy, you should observe the MACD and signal lines.
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.
If you want to place a trade in this situation, 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 moves lower, but the MACD indicator shows a higher low. Similarly, a bearish divergence occurs when the price of the commodity makes higher highs, but the indicator makes lower highs.
MACD + Relative Vigor Index
The Relative Vigor Index compares a security’s price range with its closing price. This indicator can help you understand overbought and oversold market situations, and 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
Compared to the Relative Vigor Index, the Money Flow Index generates fewer 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-second 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-second trading, you should avoid using this strategy because it’s entirely dependent on the 60-second 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 works for you best.
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 and 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.
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 the 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
The MACD, or Moving Average Convergence Divergence, is a powerful indicator that can enhance your trading profitability once you understand its basics. While it’s essential to recognize its limitations, adapting your trades accordingly is key to success. By leveraging the right MACD strategy, you can position yourself for more winning trades.
Most commonly asked questions about MACD binary options trading strategy:
What is the MACD indicator used for in trading?
The MACD indicator helps traders gauge market momentum and identify potential trend reversals by analyzing the relationship between two exponential moving averages (EMAs). It is widely used for detecting bullish and bearish crossovers, divergences, and zero-line crossovers.
What are the key components of the MACD indicator?
The MACD has 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). Together, these elements provide insight into market trends and momentum.
Can the MACD indicator predict all trend reversals?
No, the MACD indicator has limitations and may produce false positives. It is most effective when used alongside other indicators to confirm trends and minimize inaccuracies.
How do bullish and bearish crossovers work with the MACD?
A bullish crossover occurs when the MACD line crosses above the signal line, often signaling upward momentum. Conversely, a bearish crossover happens when the MACD line crosses below the signal line, indicating downward momentum.
What are some strategies that combine the MACD with other indicators?
Traders often pair the MACD with tools like the Relative Strength Index (RSI) or Bollinger Bands for additional confirmation. For example, combining MACD crossovers with RSI oversold/overbought signals can strengthen trade decisions.
