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Moving Averages Strategy for Binary Options
Improve your binary options trading style by learning and implementing the moving averages strategy. Weve already talked about chart patterns and what their significance to technical analysis is. However, its really important to clear out that in most cases things arent as clear as in the examples weve presented. In many cases there are lots of price fluctuations and different movements, making it notoriously difficult for an analyst to deduce the correct trend of an asset every single time.
One of the most interesting methods traders use to mitigate the effects of this phenomenon is to apply moving averages. Moving average is just a fancy way of saying that they calculate the average price of the asset for a predetermined period of time. This way they are able to observe the data more clearly, thus identifying genuine trends and increasing the probability of things working out well for them in the end.
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Types of Moving Averages
There are many types of moving averages, but three of them are the most popular, commonly known and most widely used. These three types are simple, linear and exponential. There may be differences in the way the average is calculated, but the interpretations remain the same. Most of the variables come from the fact that there is different emphasis put on different data points. In some cases more emphasis is placed on recent movements, while in other instances the price fluctuations of the whole period of equal importance.
Simple Moving Average (SMA)
As the name suggests, the simple moving average (SMA) is one of the simplest methods to calculate the moving average. As such, it is also very popular and commonly used by many traders and analysts. The method is as simple as they get – in order to calculate a moving average using this method, one needs to take the sum of all the closing prices of the certain period and then divide it by the number of prices taken. To make this more clear, heres an example. Lets say we want to calculate the moving average for a 10day period. In this case, we take the closing price of all 10 days, sum them together and divide them by 10. This way the strength of the trends can be measured and become more apparent. With all the illusions removed, the trader can make sound choices concerning his finances and not be worried about the outcome. Look at the example below and everything will make sense.
A large number of analysts and traders speculate that the data presented by the SMA is not detailed and relevant enough to be taken seriously. For them, recent price movements are much more essential and they believe that this aspect of the price movement should be given the proper attention and weight. Since simple moving average takes everything into consideration with the same importance, its easy to see why this argument would be held. Certainly, for many traders, recent movements are much more important and if that is not reflected in the average, they feel the average, itself, is not accurate enough. This is what lead to the creation of other methods of calculating the averages.
Linear Weighted Average (LWA)
Some experts strongly believe that the SMA isnt adequate enough to serve their needs, which is why they look elsewhere for reassurance. Where SMA is lacking in respect of relevance for these traders, linear weighted average more than makes up for. The problem is solved by adding more emphasis on more recent data. This is done by introducing more complicated calculations. Instead of simply taking the closing prices, exerts instead take the closing prices for a period of time, then multiply the closing price based on its place in the chronological progression.
For example, if we have a three day linear weighted average, then every day would be a data point, in which case we take the different closing prices and multiply them by the place of the data point. The first days closing price will then be multiplied by one, the second by two and the third by three. Then all the values are summed up and divided by the sum of multipliers (in this case it would be 3+2+1=6), essentially giving us the average with more emphasis on the third day than the first. Of course, if we were to choose a longer time window, the rules would apply all the same and it would not matter how many days weve picked. This is the basis of the principle.
Exponential Moving Averages (EMA)
Like LWA, EMA strives to put more emphasis on the more recent prices in the time frame. However, it does so in a bit more complicated and perhaps more refined manner, unlike the rudimentary nature of the LWA. To many the exponential moving average is much more efficient and preferred. In most cases you dont even have to know how the different calculations are performed because the data is laid down for you in most charting packages, meaning that you wont have to compute the averages, yourself. Everything you require is laid down before you and all you need to do is make sense of it (which can sometimes be a bit harder than it looks).
As a more advanced technique, EMA is used much more frequently used than LWA. Even though it has its critics, SMA is still very popular, leaving the LWA as the most rarely used of the trio. EMA is much more sensitive to new information than the SMA is. This is one of the reasons why it is preferred to the much simpler alternatives – because it delivers satisfactory enough information to many of the traders who employ technical analysis. If you take a look at the same chart from two different perspectives – that of the SMA and that of EMA, you will notice that as the different values rise and fall, the EMA corrects itself much faster than its simpler counterpart. The differences may be subtle, but they can be important enough to influence decisions in different ways.

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Major Uses of Moving Averages
As weve already said before, moving averages are used to dispel any illusions and deceptive factors in the data. This means that their primary objective is to assist technical analysts and traders to more easily identify trends and make decisions based on a more general data. Sometimes the information in the shortterm can lead us to believe that the market conditions are different form what they actually are and moving averages help us to deal with possible misconceptions. They also help us to set up the levels of support and resistance, which are important as well, if you remember.
Its easy to identify a trend based on the direction of a moving average. If a moving average is going up and the price is above it, then we are talking about a definite uptrend. If, however, the moving average is going down and the price movements are below it, we can clearly see a downtrend.
Another way we can determine a movement in a trend is to have a look at the relationship between two moving averages. If we have a longterm average below a shortterm one, then we are talking about an uptrend. If the shortterm average is below the longterm average, then we are witnessing a downtrend.
Moving averages can also help us spot trend reversals. There are two main signals for a trend reversal, both of them characterized as crossovers. The first one is when we have a crossover between the moving average and the price. If that should happen, then we are possibly talking about a trend reversal. This is just a signal, of course, which means that this isnt the case 100% of the time. However, the signal is strong enough and accurate in enough cases as to require caution. If there is indeed a change in the trend, it will be reflected in the moving average shortly.
The other signal is the crossover between two moving averages. If we see this, then we can almost always be sure that there will be a trend reversal. If the moving averages are both shortterm, then we might be talking about shortterm trend reversal. Logically, enough, if we see a crossover between two longterm moving averages, then this definitely speaks of longterm trend reversal.
Just as crossovers are used to signal a trend reversal, moving averages can be used as a tool to determine the support or resistance levels. Longterm moving averages are especially useful in this respect. There many cases when the price of a security would go down until it reaches the moving average, and then go back up. In this case, the moving average serves as a level of support. We know that the price will probably not break it and if it does, this signals of a trend so we will be prepared and will know what to do based on the current status of market.
Moving averages are very useful for technical analysts and help them clear out the “noise” and irrelevant (or less relevant) data they dont really want to pay attention to. They can help predict or confirm trends and give us a nice overview of the situation on the market.
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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One of the most underused and least talked about analysis tools when it comes to binary options trading is that of moving averages. Sure, these are mentioned in many types of analysis tools, but they are rarely talked about in depth. What makes this all the more peculiar is that binary option trading is all about directional movement. Let’s take the opportunity to look at moving averages more closely.
In a lot of strategy scenarios it is very difficult at best to determine the correct movement trend of an asset every single time because of price fluctuations and other short term trends. That is where moving averages come into play; they are a great way of minimizing the effect of these short term trends that often keep you from seeing the correct trending direction. Moving averages are simply calculating the average price of an asset over a set period of time.
One of the nice characteristics about moving averages is that they can be determined using different time frames. The basic thinking behind them is the longer the time frame they are based on, the stronger their indication signal is. The time frames represented within moving averages are called bars. Some of the more popular numbers of bars used to plot moving averages are 9, 15, 30, 150 and 200 bar ranges.
There are three key things that moving averages help you spot that are critical to making successful binary option trades:
1) Trends – in order to trade successfully you have to know which way an asset is trending.
2) Wave Analysis – wave analysis can be a very effective tool in spotting potential entry points in which to make a trade. Several moving averages calculated by using different time frames and then plotted together on the same chart form the basis for wave analysis to take place.
3) Coincident Indicator – If you are not sure of anidentifying signal from other technical indicators, it is often a good idea to overlay them with moving averages for comparison.
As you can see, moving averages are extremely useful tools to keep statistical analysis in balance and to keep trends from looking too skewed. This helps you to be able to see the data more accurately and clearly, in turn, you should be able to make more successful binary option trades which are based on that data. So even though moving averages are often not talked about that much, they play a very large role in successful binary options trading.
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