Displaced moving average strategy for binary options

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How To Trade with The Moving averages and RSI Strategy

By using moving averages and the Relative Strength Index, you can construct a strategy that delivers effective yet simple trades.

What is a ‘moving average’? It is the simple average over a certain number of periods. This technical indicator aids you in trading with the trend. Being lagging indicators, they do not predict future trends but instead give confirmation of trend continuation. Upward trending moving averages indicates an uptrend and vice versa.

Many traders look at the 50-, 100- and 200-day Moving Averages of asset prices but we can also use Fibonacci numbers such as 13, 21, 34 and so on to capture herd behaviour in the market. Exponential moving averages can also be used, placing more weight on the most recent periods.

Whatever the variant of moving averages, find the best one that generates reliable signals for the trading instrument. Moving averages are easy to interpret; if the price is above the moving average bullish momentum is dominating, if it is trading below the moving average then bearish momentum is dominant.

What is the Relative Strength Index (RSI)?

The strategy blueprint

The moving average & RSI strategy utilises both of these indicators to work together as a system. To follow the system, we need to examine the conditions for entry, stop loss and take profit of trades.

Entry: There are two types of crossovers with respect to moving averages that form the foundation of this strategy.

  • Firstly, when the price action closes above or below the moving average, it indicates that resistance or support has been broken and there is a shift in momentum. This can be used to determine entries into long or short positions, for instance, when the price closes below a moving average, it indicates support has been broken and a shift to bearish momentum so we should look to sell.
  • The second type of crossover is when the short-term moving average crosses over the longer-term moving average. You can use this to identify strengthening momentum in one direction. For instance, when the short-term moving average crosses above the longer-term moving average, this generates a buy signal.

Also, the RSI is used to confirm the moving average signals. The equilibrium level for the RSI is 50, where if the index is above 50 this suggests bullish momentum. When it is below 50, this indicates bearish momentum. So when the moving averages generate a signal, you can use the RSI to check if momentum is strong enough to justify taking your trade.

Stop Loss: The moving averages can be used to exit a trade when it turns out to be unsuccessful to limit your risk. You would place stops just above or below the moving averages since these are important resistance or support levels. For example, if the price action closes above the moving averages, then we would place the stop loss just below the moving averages as they will now provide support.

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Take Profit: This is where the RSI comes in. This index indicates overbought and oversold regions and suggests a reversal is more likely when the index is within these regions. Therefore, you should hold your position until the RSI enters the overbought region for buy positions or the oversold region for sell positions.

Illustrative examples

The chart below illustrates how to use this strategy. The first white arrow indicates that the price action closed above both of the moving averages giving a bullish signal. EUR-USD closed above both moving averages at 1.08919, which is illustrated by the yellow ray, and this provided an indication that an upward trend was starting. Also, the RSI was higher than 50 at this point confirming bullish momentum.

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Long positions or call options would then be entered into at this price and once that candle closed on the hour. Then we should look at the 13-period moving average (orange line) to provide support and exit the trade if the price closes below this moving average.

The long position is held until the RSI indicates overbought conditions in the market, that is when the RSI is larger than 70. This also signals that the uptrend may soon reverse. Overbought conditions are indicated by the RSI and with the white arrow on the chart. This occurs on the hourly close at 1.09535 and this would be your exit price, indicated by the yellow ray. Notice that a few hours after this, EUR-USD started to move lower and broke back below the moving averages.

Another buy signal was provided by the crossover of the moving averages indicated on the chart by the second white arrow. When the 13-period moving average crossed above the 21-period moving average, the price closed at 1.0924. Bullish momentum is confirmed as at this entry the RSI is larger than 50. The exit is still the same at 1.09535.

Now let’s look at another example but for a short position. The chart below shows GBP-USD on the daily timeframe. The slower moving average is trending above the faster moving average indicating a downward trend. The best strategy in this case is to wait for the price to test the resistance provided by the moving averages and then enter a short position when the price action closes back below the moving averages.

For example, in the chart above the price action briefly trades above the moving averages for a few days in December. Then we obtained a sell signal when the daily close was below both of the moving averages at 1.50348 indicated by the white arrow. Also, using the RSI we see that the index indicates bearish momentum since it is below 50.

So a short position or put option would be entered into at this level 1.50348. The stop loss would be either of the moving averages and an exit point is reached once the market is indicated to be oversold which occurred when the price action closed around 1.4400.

Advantages and limitations

Using shorter time periods for moving averages is more likely to lead to false signals whereas longer period moving averages are likely to give more successful signals. Similarly, using technical indicators on longer-term timeframes provides more reliable signals than those on lower timeframes. The strategy is best used on the 4-hour, daily or weekly timeframe.

Purely technical analysis most also watch out for any fundamentals and the economic calendar. Traders just focusing on technical aspects will get a shock when an unexpected data reading is released. Therefore it is important to be aware of any important data releases that may affect your trade plan based on this strategy.

In summary, this strategy is easy to use, effective and can be used to trade a range of instruments. By using Fibonacci numbers for the moving average period captures herd behaviour in the market. Two types of crossovers generate entry signals which should be confirmed with the RSI. Exits are determined by both the moving average and RSI depending on whether the trade is successful or not. When making a trade, you just wait for the RSI to indicate overbought or oversold conditions and then exit with your profit.

Utilizing the Moving Averages with Binary Options

Trading on the fixed-term contract market is correlated with a high-yielding method for earning a profit on the financial market. However, to achieve stable results and trade effectively using this tool, you need a specific set of methods and strategies, which help with analysis, assessing market indicators, and accurate forecasting trading positions. Usually, in this situation, investors use multi-faceted trading strategies, based on automatic indicators. The list of such analysis resources and trading systems is practically endless, however, in the list of basic indicator tools, there are several which are considered to be classic and more effective tools for modeling market movements, which are worth acquainting yourself with. In this case, the Moving Average is one of the most famous and popular, the function of which we will examine in as much detail as possible in our piece.

So, the Moving Average is a strategy for defining the market trends of a specific financial asset. It functions through a simple and effective algorithm, which calculates the average asset prices within a set time range. To put it simply, the indicator forms a dynamic trend line on the chart, which reflects the statistical average asset cost indicator within a defined time range. Therefore, we receive from our method the chart liquidity, from which is provided the flattest market indicators without any reflected sound or narrow short-term asset fluctuation.

Even though the computing algorithm is simple, the Moving Average is an incredibly effective tool for forecasting. It’s especially of note, how effective it is with a binary options trading regime. It’s possible to explain the approximate working format of a set-time contract, where the most important profit producing indicator is an accurate forecast of an asset rate’s direction of movement. Once you understand that the Moving Average is a trend indicator, the purpose of which is to define the direction of market movement at any current time, you have a more effective tool at your disposal.

When working with the MA, professional financial analysts note the number of advantages: the lack of the redrawing of indicators, the relatively accurate reactions to shifts in the situation of the market, the indicator’s wide selection of different types and variations.

The last fact enables, on the basis of the strategy, the creation of a long list of professional strategies and other indicator tools for technical analysis

When working with the MA, the following are worth emphasizing as the most traditional and popular types and formats:

  • The Simple MA – It is the simple and classic MA, employed using the standard algorithm. Usually, for a specific trend, investors use the SMA with a period of 50, meaning that the MA highlights the asset price value, factoring in the indicators of the last 50 rate candles.
  • The Exponential MA – It is a MA with an exponential regime, which takes into account when calculating the dynamic MA, not only the average asset cost indicator within a defined period, but also the cost change coefficient as it relates to the opening and closing price of the rate candles.
  • The Weighted MA – The WMA is the asset cost value. For this one, the indicator’s algorithm is more complicated, factoring in not only the opening and closing candles’ rate but historical information as well. To put it simply, we receive weighted market movement trend indicators with analysis of indicators within the context of their historical chart movements.

Today, there are dozens of various MA modifications and configurations. Becoming acquainted with them all would take a substantial amount of time. Therefore, we recommend only the basic variations of the MA. Undoubtedly, even this minimal selection is more than enough to develop an effective trading strategy and achieve results in the market for binary options. We recommend considering the classical strategies as methods, which work off of the various MAs.

The Classic System for the Moving Average

In this regime, set up the SMA indicator on the chart with a period of 50. As a signal for placing a set-time contract, the approximate formation direction of the MA is used, which reflects the general dynamic growth of the asset trend rate movement:

This method is very effective as a strategy for day trading or package trades. Therefore, when you use stable and well-forecasted market movements, you can obtain as many financial indicators as possible.

The MA Breakdown Strategy

The MA, when formed on an active asset chart, has the ability to generate a multitude of trade rate formation signals. So, when using the classic MA, we can accurately identify, on the chart of the trading tool, the turning points of the trend movement, which are amongst the most profitable conditions for earning profit from a binary contract. In this MA method regime, the signal is the asset rate breakdown of the MA, noting that rates must be opened in the direction of the breakdown:

This format of indicator trading signals produces more than 80% successful options, which creates the opportunity to quickly and consistently increase the profitability of your trading indicators.

Combined Trading System

This type of analysis system works by combining MAs with several format customizations and market price indicator periods. To employ this strategy, set up on your chart MAs in this format:

For the EMA change the color of the MA. Therefore, we are given the opportunity to analyze the market in several time and technical periods at once, increasing accuracy, the quality of the trading forecast, and leading to more consistent trading results. When using this strategy to trade, use simple indicator signals as a short-term concentration of MAs in one point, followed by divergence in the defined direction:

The advantage of this strategy is in its universality. This method produces accurate trading signals on any asset chart timeframe, on all financial tools without exception, at any time of day. Therefore, the basic MA variations form a highly effective strategy for trading with binary options.

In conclusion, even though the MA has been well known by market participants for a very long time, it still is one of the most effective and in demand strategies for technical analysis and forecasting around today.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

A Look At Moving Averages For Binary Options

Moving averages are one of the most basic and least talked about technical indicators I know. It seems surprising, nearly every strategy article or analysis will include some mention of a moving average but few actually talk about them. Binary options traders should find them especially useful; moving averages can provide reliable directional entry signals in multiple time frames, can do this on a single chart and are great coincident indicators. Why does this matter to binary traders? Binary options are all about directional movement, will an asset be higher or lower than it is now? Moving averages track the movement of an asset and provide the first clues as to where price may be heading next.

What is a moving average and why does it move? The most basic definition is that a moving average is a line plotted using the average price of an asset over a set period of time. For example a 30 bar simple moving average is a line created by plotting the price of an asset over the past 30 bars or trading sessions. If you are using a chart of daily prices then it is a 30 day moving average, if you are using a 15 minute chart then it is an average of the past 30 15 minute bars. Each period as a new closing price is added to the data list another is dropped off the end. In this way the average “moves” along with the asset and provides the name of the tool.

How Do You Use A Moving Average

Moving averages a can be set to different time frames. Different time frames mean different signals. In order to do this simply change the number of bars used to calculate the moving average. This is usually a simple change on most platforms. Popular moving averages are 9 bar, 15 bar, 30 bar, 150 bar and 200 bar. The chart below illustrates a daily chart of the Dow Jones Average with 30 and 150 day moving averages. Typically, the longer the time frame the longer term and stronger the signal. Shorter term time frame means shorter term signals. In addition moving averages can also be applied to different length charts for different types of analysis. In my first example I chose the 30 bar moving average because that is the one I use most. When my charts are set to daily candlesticks it is a 30 day moving average and then when I move up to a chart of weekly prices it turns into a 150 day moving average (30×5 days per week). If I move down to a chart of hourly prices then my moving average is a 30 hour moving average.

Adding to the mix is the choice of simple or exponential moving average. To recap, a simple moving average is an average of the last X number of data with each data point getting equal weight. As a each day closes it is added to the list and the last days data is dropped off. An exponential moving average is exactly the same except that today’s data is given more weight than yesterday’s and yesterday’s more than the day before and so on down the line until you reach the end of the sample. Because the front end of the data is given more weight it responds to price changes quicker than a simple moving average. It also tracks prices more closely and can give more false signals. If you look at the chart above you can see what I mean. The exponential moving average is moving over and under the simple moving average even though they are set to the same time period. The same is true for the pair of 150 day moving averages.

How To Apple Moving Averages To Binary Options

The answer to that question can take up volumes, maybe shelves, of books. However, there are a few key areas in which moving averages are particularly helpful. The first is trend. A moving average is, or can be, the first step in determining a trend. If the MA is pointing up then the asset is moving higher on average, otherwise known as trending up. If it is pointing down then the asset is trending down. Because you can use different periods with your moving average it is possible to measure trend in more than one time frame on the same chart at the same time. The chart above shows an asset that is trending up in the long term (150 bar MA’s) and sideways to uppish in the shorter term (30 day moving averages). Moving averages can also provide support and resistance targets. The chart above shows an asset that is supported in the long term evidenced by the bounce in prices from the long term 150 bar EMA. Notice how this asset is also getting some volatility when it crosses the 30 bar MA’s. This could be a potential entry signal for binary traders.

Two other important ways that advanced binary traders can use moving averages is for wave analysis and as a coincident indicator. A chart filled with moving averages of different lengths is a basic form of wave analysis and one that can be quite effective. Each moving average provides a targets and signals for entry, when one average crosses another a signal is given, the more averages that get crossed the stronger the trend. The chart below shows what I mean. A series of MA’s can provide accurate wave style analysis and accurate entries for binary options traders. In essence each moving average confirms another as the asset moves higher or lower which leads to my next point. Moving averages are a great coincident indicator. If you are getting a signal from just about any other technical indicator throw a couple of MA’s up on the chart and see what they look like along side your original analysis.

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