Although moving averages are one of the simplest strategies in binary options trading, they are not often talked about. Moving averages are very helpful to binary options traders as they provide good directional entry signals in several time frames and they are excellent coincident indicators. On top of all that, they can do all this on just one chart.
Moving averages matter because trading binary options is about directional movement of the market and the prediction of whether an asset’s price will move lower or higher. A moving average tracks an asset’s movement, providing an initial clue about where its price may next head.
What is a Moving Average?
A basic definition of a moving average is that it is a line which is plotted by using an asset’s average price over a specific time period. For example, a 30 bar moving average is a line which is create by plotting an asset’s price over the previous 30 trading sessions – in the case of a daily price chart that would be a 30 day moving average, while in the case of a 15 minute chart, it would plot the average of the last 30 fifteen minute bars. With every new closing price that is put on the data list at the end of the period, one is removed and thus the average will move with the asset, giving the tool its name.
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How to Use a Moving Average
A moving average can be set on various time frames as this means different signals. It can be achieved simply by changing the number of bars which are used to make the calculation of the moving average. The most popular moving averages including the 200 bar, 150 bar, 30 bar, 15 bar and 9 bar. Usually, the longer the time frame selected, the stronger the signal will be.
There is also a choice of either an exponential or a simple moving average. The simple moving average is as described above, being the average of the asset’s previous prices over the time frame selected. The exponential moving average is similar except there is more weight given to the current day’s data, with decreasing weight given to the data as it goes back in time. As the most recent data is given extra weight, the response to price changes will be faster than experienced in a simple moving average. Prices are also tracked more closely, but more false signals may be given.
When applying moving averages to binary options trading, there are several key areas where using moving averages is especially helpful.
Trend is perhaps the most important of these as a moving average can be the initial step in determining trends. If a moving average points upward, the asset is, one average, moving higher, or trending up. Conversely, if it is pointing downward, the asset is clearly trending down. As the moving average can be used with different time frames, trend can be measured in multiple time frames on one chart simultaneously.
The moving average also provides targets for resistance and support, giving potential entry signals to binary traders. They also can be used as a coincident indicator or for wave analysis, and if another technical indicator is giving a signal, it is possible to add a few moving averages to the chart to confirm the original analysis. Charts that are filled with different length moving averages is one basic type of wave analysis that can be fairly effective. Every moving average provides an entry signal and when one average crosses with another, a signal is indicated. With an increased number of crossed averages, the stronger the trend is. A series of moving averages is able to provide an accurate wave style analysis as well as clear entries for the trader as every moving average confirms the next as the asset’s price goes lower or higher.
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- Technical analysis: An asset allocation perspective on the use of moving averages.Zhu, Y., & Zhou, G. (2009). Journal of Financial Economics, 92(3), 519-544.
- Monthly moving averages—an effective investment tool? James, F.E., 1968. . Journal of Financial and Quantitative Analysis, 3(03), pp.315-326.