In binary options trading, there are multiple technical indicators that you can use to make accurate speculations. Out of those indicators, some are complicated, and some are easy to use, as the MACD indicator.
MACD, also known as Moving Average Convergence Divergence, is a technical indicator that you can use to increase the profitability of your trade. For that, you must know the fundament of this indicator.
Moreover, you should know how it works and what are its different trading strategies. Also, you must know about the limitations of the MACD indicator.
You will find answers to these questions in this guide.
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MACD is an excellent indicator that measures the connection between two exponential moving averages (EMA). Gerald Appel, in the 1970s, has developed this technical indicator.
The generated data is shown via three lines: the MACD line (blue line), the signal line (red line), and a histogram (green).
Here, the MACD line is the result of the difference between two leveled moving averages. The difference is calculated in assets 12 day (fast) and 26 day (slow). Similarly, the signal is a 9-day exponent average of the MACD line. Lastly, the histogram is the result of MACD minus signal line.
The MACD histogram will increase if the asset moves strongly in a particular direction. But if the histogram starts to shirk, you can conclude that there will be a price reversal.
Since the MACD line wave in and out around zero lines, it resembles the characteristics of an oscillator. You can spot this indicator on the chart as two lines that are oscillating without any boundaries.
You can analyze the data to make a trade using this indicator. You can further buy the security when the MACD line crosses above the signal line. But you should sell the asset if it crosses below the signal line.
MACD is a great indicator that can be interpreted in various ways. But rapid rises/falls, convergence, and divergence are a few standard methods.
In short, Moving Average Convergence Divergence is a helpful indicator that helps to identify short-term trend direction quickly. Also, it helps in spotting trend reversal. That means you can find better trading opportunities when using the MACD indicator.
The name of the Moving Average Convergence Divergence says everything that this indicator does. This indicator is a quick way of spotting periods when the trends in the market are either converging or diverging.
If the asset’s price goes in the same direction as the underlying asset, it shows a convergence. On the other hand, if price travels in a different direction, it indicates divergence.
If the short-term EMA is above the long-term indicator, then there is a divergence. But if the EMA and indicator are moving together, it is convergence. Additionally, 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 the 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.
Here’s a quick overview of how the MACD indicator works.
- In a bearish situation, the MACD turns down from above zero. Similarly, in a bullish situation, the opposite happens.
- Furthermore, if the MACD line crosses the signal line from down to up, 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 if the MACD line crosses from above to below. Here, if it’s above the zero line, it’s considered a strong signal.
- While trading, if the MACD whipsaws, you should not trade. That’s because such a situation shows the market is volatile. Also, it will be difficult to predict the trading market’s movement accurately, resulting in a loss.
You can make short trades like 60 seconds trading by using the Moving Average Convergence Divergence indicator.
To start the process, you can modify the setting of MACD. The default configuration will be 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).
Additionally, set the MACD main line as line and signal line as white. There are a few conditions you need to know about to make correct 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.
Here are a few strategies that you can use to trade with the MACD indicator.
When the MACD line goes from positive to negative, MACD 0 line crossover occurs. It loosely translates that the asset is moving from positive momentum to negative momentum or vice versa.
In this case, if the MACD line crosses from negative to positive, it’s seen as a bullish sign. Thus, it is called bullish crossover. Similarly, if the line crosses from positive to negative, it’s a bearish sign, i.e., bearish crossover.
One thing you should remember is that o line crossover not always indicates that momentum has switched. For instance, if there is a trading situation where the MACD line is close to 0 for some time, it indicates that the momentum is low.
To apply this trading strategy, you should observe the MACD line and the signal line.
A bullish crossover is when the MACD line is below the signal line. It further shows that the momentum is about to turn the other way. Similarly, a bullish crossover happens when the MACD line goes above the signal line.
If you want to trade through the MACD indicator using high/low options, enter a call option for a bullish crossover. Similarly, enter a put option for a bearish crossover.
If the actual movement of price is different from what MACD has assumed, then MACD divergence occurs. Seeing this, you can conclude that sooner, momentum will diminish.
In this situation, if you want to place a trade, you should wait for divergence between the underlying price and the MACD indicator. The divergence can be further divided into two categories, i.e., bullish divergence and bearish divergence.
In a bullish divergence, the price of a commodity travels low, but the MACD indicator shows a higher low. Similarly, a bearish divergence occurs when the asset price is moving higher highs but the indicator records lower highs.
Relative Vigor Index is an indicator that matches a security’s price range to its closing price. You can use this indicator to understand the overbought and oversold situations in the market. You can further use the MACD indicator to match crossover.
If both the indicator shows a crossover in the same direction, you can buy or sell the asset. You can further wait till the MACD gives a signal to close the trade.
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.
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 opinion 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.
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.
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.
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.
If you want to make profitable trades by using the MACD indicator, you should pick one of the best brokers for the work. When looking for brokers, don’t forget to check the minimum deposit amount, minimum trading amount, demo account availability, and other important aspects.
Also, you should try to select a trading platform that is regulated by some trusted authority. That’s because this way, the risk of losing money is less. Some popular brokers are eToro, Fortrade, Skilling, Pepperstone, easyMarkets, and Libertex.
Although the fundaments of Moving Average Convergence Divergence and relative strength index sound the same, they are different.
RSI shows the market overbought and oversold in comparison with the recent price levels. It also measures the price change with recent price highs and lows.
Whereas, Moving Average Convergence Divergence shows the connection between two EMA. You can use these indicators together to generate better results.
MACD, i.e., Moving Average Convergence Divergence, is an excellent indicator.
Though it can be a little daunting to understand the fundaments of this indicator at the beginning, once you have learned what convergence and divergence are, you can use them to increase your profitability.
When using this indicator, it’s also important to remember the limitations and make trades accordingly. Furthermore, you must look for ways to succeed in the limitations. Lastly, you can use the right MACD trading strategy to make a winning trade.
(Risk warning: Trading involves risks)