How to trade with MACD? Learn to set up and apply
The MACD has been proven its worth in the Forex and stock markets for a number of years and has been the staple tool for any technical analyst.
Yet the question remains, how effective is it when trading binary options? It is a lagging indicator that is used to follow trends.
The MACD consists of two exponential moving averages and a histogram. These indicators will use the closing price of the asset in their calculation. There is another indicator that is added to the MACD representation and that is the histogram. It is easy to tell when looking at the histogram whether there is a bullish indicator or bearish indicator.
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Converging is when the price is going in the same direction of the underlying trends. Diverging is when the price is going in the opposite direction.
It is a convergence when they are moving together. This is a bearish indicator.
How to use MACD Indicator to Trade Stock & Binary Options
When the Signal line and MACD histogram are included, the binary options trader is able to get a lot more colour and is able to determine whether the MACD indicator itself is converging or diverging.
We have also plotted the price charts using candlestick indicators and moving averages above which are for indicative purposes. Using macd in binary options you can see, the MACD is calculated as the difference between the two moving average lines in the main price chart.
Looking more specifically at the The 101 Secret to Trading Buy Options chart, the light blue line is the MACD indicator, the red line is the moving average of the MACD and the histogram is the difference between the two.
When the trader sets the Using macd in binary options periods to the option expiry periods, an even more accurate reading is presented. It will help the trader assess whether they should indeed enter the option up or down. The MACD indicators can also be used when the trader wants to employ more exotic binary options such as one touch and no touch options. Below we will run through some examples of binary option trades that you can embark on once reading the MACD indicator.
This is an indication that the asset using macd in binary options be moving from a situation of positive momentum to negative momentum and vice versa. When the MACD crosses from negative to positive then this is seen as a bullish sign and is called a bullish crossover. On the other end, when the MACD crosses from positive to negative this can be a bearish indicator and is called a bearish crossover.
Indeed, a using macd in binary options line crossover may not be an indication that momentum has switched.
How to Use MACD Indicator to Trade Stock & Binary Options
For example, there may be a situation where the MACD elison trading remain close to the 0 line for some time going forward. These are indeed hard to read and just show that momentum is currently quite limited. Taking a look at an example of a binary options MACD crossover trade, below we have the price of Ether USD with the time period set to five minute candles.
This was a Bullish crossover and was an indication that there was a move to positive momentum in the price of Ether. In this case, the trader should consider entering a 5 minute binary option CALL on the price of Ether.
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As we can using macd in binary options, the next candle ended up closing considerably up from its open. This means that the CALL option would have ended up in the money and paid the trader off.
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In general, when the MACD line goes over and crosses the signal line, this is a bullish positive. On the other side, when the MACD crosses the signal line to the downside then this is considered a bearish crossover and shows that momentum could be turning the other way.
Back to Basics: Trading with MACD
In the below chart, we have the price of Gold with Candlesticks placed on a 2 minute horizon. Hence, the trader should consider 2 minute binary option trades as the instrument. As you can see, there was a signal crossover and this was a Bullish crossover as the MACD has passed over the signal line.
We can also see that the Histogram has reversed and is now positive. As this is a bullish signal with momentum reversing to the upside, the trader should place a 2 minute binary CALL option on the price of gold.
Indeed, the trade would have expired in the money as the closing price of the candle was above the opening price. Although trading binary options with the MACD can indeed be profitable, the trader needs to be careful placing trades when the MACD line is at all-time highs or lows.
This is usually a sign that the momentum is indeed tapering out and should make traders weary. As using macd in binary options have mentioned, momentum is a key ingredient in a trend continuing its trajectory.
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Hence, if the binary options trader is to observe a divergence between the MACD and the underlying price then this is an indicator that they should consider placing a trade that is contrary to the trend. A reversal from the current trend in the price is indeed possible. There are two types of MACD divergences. There is the Bullish divergence which occurs when the price of the asset continues reaching lower lows but the MACD indicator itself records a higher low.
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As you can see, the index is reaching higher highs but the MACD seems to be reaching lower highs. This is an indication that some of the momentum behind the price move is indeed eking out. Of course, it is quite difficult to ascertain when this should exactly be done as we can see that the price kept on climbing even though the MACD was falling.
You can see Macd in several forms out there because the traders and the coders try to adjust it to the their current strategy. The default setting of this indicator are 12,26,9. Look at the first screen shot. In this chart we have a MacD with default settings without the histogram. We have only the zero line the purple line and two EMAs, the 12 day which is the faster one and the 26 day which is the slower.
At this stage, it should how to make money legally an indication to avoid a CALL option trade at this point. In this case it appears to be occurring at the same time that we are having a bearish divergence.
At this stage, the trader should place a 10 minute Binary PUT option in expectation of a fall in the price. Indeed, if the trader had done this, the option would have expired in the money as the candle closed down below the open.
The trade would have ended profitably and paid the trader out. Other Considerations These MACD strategies have worked effectively for a number of years and are borrowed from traditional forex and stock trading.
Ways to use MACD
However, even if you think that you have a perfect opportunity to enter a trade, you have to take into account other technical factors which could also have an impact on the price at that point in time.
Similarly, when using a binary options trading strategy, you need to also make use of a money management strategy.
Each of them has its time and place.
This is because profitability is impacted by more factors than just what trade is placed. The trader will need to be measured in the amount that they would like to stake on each trade as well as know when to stop trading if the MACD binary option strategy is going contrary to expectations.