How to use MACD Indicator to Trade Stock & Binary Options

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Among the best methods used to determine when and how to purchase binary options is with MACD Indicators. The term MACD simply stands for Moving Average Convergence and Divergence of a securities asset. MACD chart analyses differs from Bollinger band analysis because it does not contain upper, middle and lower bands; instead it uses two bands that when plotted often crosses both above and below each other. It is becoming by far one of the most used indicators there is around today.

How does it work? MACD is used to identify changes in the direction, strength, duration, and momentum of a current trend in an investment assets price.

A MACD line is simply charted by using the difference between a twelve day and twenty six day exponential moving average (current data is given more relevance than past data) of closing prices. Then a charted line of a nine day simple moving average, often termed the “signal line”, is added to identify potential buy and sell instances.

The information the resulting chart supplies is then analyzed on what is called a zero sub level. If an asset is near or below zero sub level then it is said to indicate a bearish market and calls for purchasing binary put options. If this same security asset is above zero sub level then a trader should look to place binary call options.

MACD is thought to be a powerful tool these days when it comes to making binary options market transactions. Many traders are even combining it with other method indicators to experience even greater returns on their investments. So once you learn how to use MACD and learn its strengths and weaknesses, you can become like many other traders and routinely make a return on investment on your binary option purchases.

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MACD Pullback Binary Options Trading Strategy – How it Works

Binary options traders know that markets move like waves. A gradual and sustainable trend is always full of retracements, rebounds and whipsaws in the opposite direction, giving a chance for traders to use that advantage, finding entry points. Unilateral action is vulnerable to a complete reversal and even entire plunge, thus, we’d consider usual price action in this article. The toughest task for any analyst, including a technical one, is to determine the depth of a potential retracement and find the perfect moment to start the trading cycle. Even short-term periods of sustainable action could give significant profits in binary options trading.

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MACD Pullback Binary Options Trading Strategy Overview

Every trading system must be simple to use, and reliable and the MACD indicator Pullback strategy is not an exception. Two well-known and straightforward technical indicators are used here. The primary one is popular trend tool – MACD – with default settings. The second instrument to monitor the price action is the exponential moving average with the period of 50 bars. Short-term traders, who prefer timeframes like 15-minutes and one-hour, would not like this system as it requires patience. The first chart to analyse is the four-hourly timeframe, while the daily cycle also works well. Any underlining asset could be chosen for the MACD Pullback Binary Options Trading Strategy as its both indicators are reliable for any asset class including currency pairs, commodities, shares, stock indices and even cryptocurrencies. The essential requirement is related to the trading volume as MACD does not include all of the price fluctuations for low-liquid assets trading in thin market conditions. Price gaps aren’t the best option in this case.

What is MACD Indicator

The main idea of the price action is to catch a rebound of the price after an initial spike upside or plunge as the direction does not matter. MACD indicator perfectly shows the change in the trend’s momentum with its lines – MACD line and Signal line. The trigger is a crossover of those curves. Traders should pay attention to three critical stages before starting the cycle — first, MACD line breaks above/below the zero line during the initial action. Second, an opposite crossover occurs, pointing to the start of the rebound. Third, both MACD lines cross each other again, showing the continuation signal with the condition that the price should stay above the EMA50 for an uptrend and below the curve for a downtrend. We start opening deals on the third trigger.

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Conclusion

Exit conditions are always different, and they depend on such factors as the volatility of an underlining asset, trend’s strength, fundamental elements and long-term trend direction. Risk management rules should be applied, as well. The primary approach is that grabbing several lucrative deals in comparatively short-term period is always an advantage rather than overtrading and having losses instead of gains. Therefore, too long cycles add risks. The most significant advantage of the MACD Pullback Trading Strategy is that it’s reliable and efficient. An example of the MACD trading strategy in action is shown on a four-hourly GBP/USD chart below.

Using the MACD to Trade Binary options

Momentum in the capital markets is similar to the momentum of riding a bicycle especially down a hill. The more speed a bicycle rider has, the further they are likely to go. The same goes for market momentum, so the key is figuring out how to measure it, and use that information to generate trading signals. One of the best tools to use to measure momentum is the MACD – Moving Average Convergence Divergence Index. The MACD measures the difference between two moving average, referred to as the spread, and compares the spread to a moving average of the spread.

The defaults for the MACD are the 12-day moving average and the 26-day moving average to create the spread. This difference is compared to the 9-day moving average of the spread. For binary options traders interested in intra-day periods, an hourly or 15-minute bar can be used to create signals. Traders should also considered altering the default periods to find a grouping of time periods that suits their trading style. For example, a short term trader could consider a 5-day / 9-day spread periods with a 3-day moving average of that spread.

The S&P 500 graph shows the last two crossover signals generated by the MACD. The black arrows show a buy signal that was generated in early July which caught the majority of the July rally. It also displays the sell signal created just after the S&P 500 index topped, which also proved to be profitable.

The MACD is a leading indicator, and generally catches the beginning of a trend. The risk is that during a consolidative period, the MACD generates many false signals during a choppy market environment.

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