Moving averages are one of the most popular technical indicators in the retail trader’s community. One of the main reasons of their success is that they are really easy to read and interpret on a technical chart in order to take an investment decision. What is a moving average, a moving average is the arithmetic average of a number of data points over a chosen time period. The most commonly used data points are closing prices. The 20 day moving average will thus be the arithmetic average of the last 20 closing prices for a specific asset. The data is then smoothed daily and is used to identify the beginning or termination of a trend.
How to use moving averages for binary option trading?
The most commonly used moving averages by professional traders are the 20 day, 50 day, 100 day and 200 day moving averages, they use this moving averages on candlestick charts most of the time. The shorter the investment horizon, the more traders will use a short-term moving averages to identify potential technical supports and resistances. Moving averages can be used to identify trading trends (long term bullish trend when moving averages all in uptrend and vice-versa) but also to determine support and resistance levels on which the asset is likely to bounce or breakout.
Using moving average crossovers to identify BUY/SELL signal
A buy signal is generated in the context of a single moving average crossover when the closing price of an instrument moves above the selected moving average; it is called a bullish crossover. Conversely, a sell signal is generated when the closing price moves below the moving average; it is called a bearish crossover.
Implications: A bullish crossover can be used to implement long positions, while a bearish crossover can be used to reverse positions and to initiate a short position.
A buy signal is generated as part of the double crossover method when the shorter moving average closes above the longer moving average. This is often referred to as “the golden cross”. Conversely, a sell signal is generated when the shorter moving average closes below the longer moving average. This is often referred to as “the death cross”.
Implications: The “golden cross” can be used to implement long positions, while a “death cross” can be used as a take profit and to initiate a short position.
Most of the binary option brokers presented on the website propose platforms that will enable you to display live charts and moving averages to help you take quick investment decisions. The broker that offers the most advanced technical analysis tools for binary options trading is without a doubt OptionTime. Don’t hesitate to consult our detailed reviews of OptionTime, 24Option, AnyOption or TopOption for further information.