MACD Indicator & Its Use In Strategies
When we talk about Binary Options trading strategy, MACD is one of the best strategies which the trader can use as an ideal indicator in financial market. This technical tool is based on the relationship between two moving averages of prices. It can be used in different ways to determine trend, trading signals and reversals.
MACD is moving average convergence divergence strategy. 26 EMA less 12 EMA gives us the MACD line. A 9 day EMA of the MACD line is plotted with the indicator which acts as a signal line and helps to identify reversals too. The difference between MACD and its 9 day EMA represents the MACD histogram. When the MACD line is above the Signal line, the histogram is positive and when the MACD line is below the Signal line, it is negative. 12, 26 and 9 are the default settings used for this indicator. The
MACD generates good entry signals and there are number of ways to use it.
Indicators used on a MACD chart are:
– 50 SMA
– 100 SMA
– MACD line (it is set as 12, 26 and 9 by default.)
The time frame is set as 5 minutes ideally. The position of the two SMAs determines the trend of the market. When 50 SMA is above the 100 SMA it indicates bullish trend. A trader takes a Call when market is bullish. On the other hand when the 50 SMA is below the 100 SMA it indicates a bearish trend, the trader would take a Put. The signal is taken simply when the MACD is overbought or when it is oversold. This is determined by the MACD crossing over over whilst at the same time the price goes past the SMA. This means that during a downfall, a trader will have to wait for prices to correct above the moving averages. A signal will be then generated when the indicator is in the overbought side and makes a bearish crossover. The MACD histogram is of help in this situation as it predicts the crossover and the signal.
This is suitable for not only the beginners but for experienced traders too. This strategy is a useful indicator in binary options trading. It is also works well when used with other strategies to find potential entry points. Broadly there are three different ways that traders can utilise MACD indicator to analyse the market conditions. These strategies are Trend Strategy, Ranging Swings and the Reversal Strategy. MACD is a very useful indicator, however it is advised that this is used in conjunction with another indicator such as the Stochastic Oscillator to confirm.