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Moving Averages are one of the most widely used technical analysis indicators . Moving Averages basically calculate the average price of a certain number of periods in a given time frame to smooth out price fluctuations and help traders get a visual representation of the overall movement of an asset. In binary options trading, short period moving averages are used primarily to generate trading signals. And Moving Averages with a longer period, such as 50 or 200, are used to find potential support and resistance.

Moving Averages indicator

When Moving Averages are used to generate signals based on directional movement to enter a Call or Put option on a currency pair, the basic concept is that traders believe that past price movement will continue into the future.

In this guide to moving average strategies, we will discuss how you can use and apply them. In addition, we will also touch on some of the problems with using trendlines versus moving averages and how to mitigate such problems to improve the effectiveness of the strategy.

Today we will consider such moving average strategies as:

  1. Using moving averages to determine the current trend when trading binary options.
  2. Crossing moving averages when trading binary options.
  3. Trading pullbacks using moving averages when trading binary options.

Different Types of Moving Averages Used in Binary Options Trading

There are dozens of different versions of binary options indicators based on moving averages, which use similar algorithms, but different calculations and values. However, the two most common moving averages used in binary options trading are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

Simple moving average (SMA) and exponential moving average (EMA)

The SMA, as the name suggests, draws lines based only on the average price while the EMA relies on later time periods. So, if you are using a 21-period moving average, the line will prioritize the last few periods (or bars) over the time periods at the beginning of the series.

Difference in Moving Average Periods

While the EMA is more sensitive to price changes and can generate trading signals much earlier than the SMA, there is a trap that beginners can easily fall into. This type of average can generate more false signals compared to an SMA. A small price change can send the EMA at a much higher speed than the SMA, giving a false reversal signal.

Essentially, using the EMA will give us the opportunity to enter the trade earlier, but there is a chance that the signal will be false. Conversely, using the SMA will lead us to a later entry, but most likely this entry will be much more accurate and more likely to produce a profit. If there is a strong trend, then using the SMA, on the contrary, will give later signals after the correction and part of the profit will remain in the market.

Ideally, you should try to develop a trading strategy in which the SMA will not only generate a signal to open an option, but also help minimize the false signals that the EMA gives. But today, for the sake of simplicity, we will look at examples with EMAs to demonstrate how you can use Moving Averages in your trading strategies.

Characteristics of a strategy for binary options based on moving averages

  • Terminal: MetaTrader 4 .
  • Time frame: M5.
  • Expiration: H1.
  • Types of options: Call/Put.
  • Indicators: Moving Average.
  • Trading instruments: Any.
  • Trading hours: 9:00-17:00.
  • Recommended brokers: Quotex , PocketOption , Binarium .

Installing the Moving Average Indicator in MT4

This indicator is standard and is present in any MetaTrader 4 terminal.

When adding the indicator to a chart, you can use any moving average period, be it a combination of 5 and 10 or 15 and 30 periods, but the best crossovers are always based on the Fibonacci sequences - 5, 8, 13, 21... and so on. In the examples we will use periods 5 and 21.

To avoid setting up the schedule yourself, you can download a template at the end of the article.

Instructions for installing indicators in MetaTrader 4:

Binary options trading strategies based on moving averages

There are many ways to integrate Moving Averages into a profitable trading strategy. We will look at the three most effective ways to trade with them.

Using moving averages to determine the current trend when trading binary options

Most currency pairs stay within certain ranges most of the time, both narrow and wide. Market trends appear much less frequently than flats. However, entering the trend early gives the greatest chance of profit and reduces risk. This is why trend following strategies are often the most profitable.

The problem when working with a trend is that the price cannot go indefinitely in one direction without pullbacks. During an uptrend, a trading asset may begin to adjust more than once, which confuses traders. The picture below is an example of such a movement on the EUR/JPY currency pair, where during an upward long trend on the M5 time frame we can observe many rollbacks, after which the trend resumes again. When using the 200-period EMA, it becomes clear that during pullbacks the average does not change its direction, which indicates the continuation of the trend. This in turn makes it possible to reopen Call options.

Moving Averages and trend

Therefore, understanding how to differentiate a pullback from an actual trend reversal will ultimately allow you to reduce your risks and increase your profits when trading binary options.

Every trader should definitely learn how to determine the trend in the market , and if this is difficult to do at first, then using a moving average will help with this.

Crossing moving averages when trading binary options

Moving average crossover is one of the most popular trading strategies for binary options and is popular for good reason. Moving Averages smooth out price action when one lower period moving average crosses upward or downward into another higher period moving average, confirming that price direction has changed.

Opening a Call Option

Call option

In the figure we see that the price of EUR/JPY is above the 200-period EMA, which indicates an upward trend in the market. After each pullback, you can consider opening Call options as soon as the 13-period average crosses upward from the 21-period average. Please note that the Asian session should be ignored as the market is very sluggish at this time.

Opening a Put option

Put option

To open a Put option, the same rules are used, only in reverse. The price is below the 200-period EMA. The pullback found resistance at the same EMA, and at the next signal we open a Put option along the trend.

Trading pullbacks using moving averages when trading binary options

Trading with the trend would be much easier if there were no pullbacks, which often confuse new traders. However, there is a great way to determine whether a cross in the opposite direction is a retracement or truly a reversal. To do this, we need another indicator called Stochastic Oscillator . We will use standard Stochastic settings - 5-3-3.

Opening a Call Option

During an uptrend, the price will often find support at moving averages, which can also be used to enter a position. It is important that the price touches the moving average and ultimately closes above it. After the candle closes, you can open an option.

Call option

Opening a Put option

The situation is similar in a downward trend. There are Stochastic readings and there is a close below the EMA. Open the Put option.

Put option

Conclusion

Strategies based on moving averages are one of the simplest and most effective ways to trade binary options. However, you need to remember that long and strong trends are rare, and it takes a lot of patience to wait for the right point to enter a position.

In any case, always test all strategies on demo accounts and only after that proceed to real trading. You can always choose a trusted broker from our rating of binary options brokers on our website. We wish you success in trading!

Download a template of strategies based on Moving Averages

Download

Can't figure out how this strategy or indicator works? Write about it in the comments to this article, and also subscribe to our YouTube channel WinOptionSignals , where we will definitely answer all your questions in the video.

Broker

See also:

How to read a binary options chart

Books on trading

Psychology in trading - what does a beginner need to know?

How to choose a binary options broker

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Comments

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Alexey
Пользуюсь исключительно скользящей средней и MACD
17 November 2023
Answer
Сергей Лобанов
Сергей Лобанов
Стратегии на скользящих средних хоть и эффективны но у трейдера должно быть достаточно терпения. чтобы дождаться подходящей точки входа. Как правило, новичкам такого терпения не хватает.
24 May 2021
Answer
Becks
Becks
это с одной стороны и просто индикатор, а с другой очень эффективный
28 January 2020
Answer
ТрейдерБО
ТрейдерБО
Машки всегда были в приоритете, они толком то и не опказывают ничего кроме той же цены, только сглаженной. Ради удобства наблюдения за трендом они хороши
28 January 2020
Answer
Пашка
Любимый индикатор был всегда, это классика, которой пользовались десятки лет назад, даже когда компов еще не было. ведь его не сложно и изобразить на графике!
28 January 2020
Answer
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