Binary Options Moving Average Strategy
The binary options moving average strategy identifies trends and reversals. The beginner-friendly indicator does this by showing the correlation between two moving averages of an asset’s price.
This guide explains how to trade binary options using moving averages, with examples, tactics and tips unpacked. We also list the pros and cons of the binary options moving average strategy and rank the top supporting brokers.
Binary Options Brokers
How Does The Binary Options Moving Average Strategy Work?
The moving average (MA) is a widely used binary options indicator. It is a tool that represents data by calculating the average price of an asset over a period. By doing so, the moving average filters out noise from the price fluctuations in the short term, and indicates the longer-term direction of a price trend.
Importantly, the time period can be adjusted to suit various trading systems and binary options contract lengths. You can set it to 30 minutes, 1 day, 4 weeks, and longer. The moving average can also be used alongside other indicators to develop useful trading signals.
Types Of Moving Average
There are several types of moving averages, however, the Simple Moving Average (SMA), Weighted Moving Average (WMA), and Exponential Moving Average (EMA) are the most widely used for binary options trading.
Simple Moving Average
The SMA takes the sum of all the closing prices during your chosen period, and then divides it by the number of periods in question.
For example, say you take a five-period moving average with closing prices in order: $1.00, $1.04, $1.08, $1.05, and $1.06 (latest closing price). Your moving average for the last day would be:
(1.00+1.04+1.08+1.05+1.06)/5 = $1.046
The chart below shows the 20-period SMA in yellow, and the 10-period SMA in pink. The ‘period’ in question will vary depending on the type of chart you are looking at, for example, whether it’s a 5-minute chart, or a 1-day chart.
The more periods considered by the moving average, the less affected the SMA will be by each individual price movement. This is why the yellow line looks less volatile than the pink line.
Importantly, some binary options traders and analysts believe that the data SMA gives is not detailed enough, as it puts equal emphasis on all of the prices in its range. They believe that recent price movements are more impactful, and therefore will often use other methods of moving average calculation.
Weighted Moving Average
The WMA seeks to resolve the relevancy problems of the SMA by changing the way that the average is calculated. While still averaging prices over a period, the WMA now weights each price. This allows the tool to output a price that is more affected by recent prices than older ones.
The WMA essentially picks up on recent trends quicker than the SMA, which could enable you to open a winning binary options contract with more confidence.
However, the drawback is that short-term fluctuations have more of an effect on the WMA than the SMA. This leads to a greater likelihood of encountering false signals, for example whipsaws: when a price moves in one direction, but then quickly pivots in the opposite direction.
Exponential Moving Average
The EMA is another tool that weights each price, with recent prices given a greater weighting. However, it does so in a more sophisticated manner: by using an exponential smoothing constant to apply appropriate weight to recent prices.
While the EMA is more widely used than other WMA tools, it does come with similar drawbacks. Compared to the SMA, it is more affected by short-term fluctuations, and is therefore vulnerable to more whipsaws. However, it will also represent price trends more closely than SMAs within the same time period.
Binary Options Strategies And Tactics
A binary options moving average strategy is generally used to identify trends and potential reversals.
There is no best binary options moving average strategy, but knowing how to use moving averages to your advantage will elevate any system that you apply it to.
Single Moving Average Trends
Trends are relatively easy to identify when looking at the direction of a moving average.
You can identify an uptrend when the moving average is going up, and the price is above it. Conversely, you can identify a downtrend when the moving average is going down and the price is below it.
These are illustrated in the diagram below, starting with an uptrend and ending in a downtrend.
The simplest binary options moving average strategy is to trade in the direction of the trend:
- Entering a low trade when the moving average is decreasing
- Entering a high trade when the moving average is increasing
Short-Term & Long-Term Trends
You can also look at the relationship between short-term and long-term moving averages to find trends. If the short-term average is below the long-term average, that indicates a downward trend.
On the other hand, if the short-term average is above the long-term average, that indicates an upward trend.
Trend Reversals
There are two main ways to identify trend reversals using binary options moving averages. The first is when the moving average and the actual price cross over. This signals a possible trend reversal, however, it is not accurate 100% of the time.
By looking at the previous example chart, you can see that the price crossed the moving average and then continued to fall. However, the first crossover did not lead to the reversal right away. The price fell below the average to “test the waters” before going back up above the MA. It then crossed again and reversed into a downtrend.
While this signal isn’t accurate every time, if the MA period is set correctly, it can be a useful binary options signal in conjunction with others.
The other, more consistent way to signal a trend reversal is when two moving averages cross. When two short-term moving averages (with different periods) cross then you can expect a short-term trend reversal. Likewise, when long-term moving averages cross then you can expect a long-term trend reversal.
Support And Resistance
Long-term binary options moving averages are useful for determining dynamic support and resistance levels. This is because in the long term, price-MA crossovers typically indicate a reversal. As such, you can expect the price to reach the long-term MA without crossing over unless there are other signals suggesting a reversal.
Dynamic support and resistance levels are different from regular supports and resistance levels, they are constantly changing depending on recent price action. The diagram below is an example of this.
The yellow line is the long-term (50-period) MA while the green line is the short-term (10-period) MA. The downtrend was expected to go on if the two MAs were kept apart. The price tested the long-term MA early on before bouncing back, and then once again a little later. Here, the long-term MA acted as a dynamic resistance, with the price bouncing back down.
Later, the MAs converge and crossover. This could indicate that there will be a reversal rather than a bounce back, and this signal is correct as the price then goes into an uptrend. Traders could open a high binary options contract to capitalize on the reversal.
How To Set Up Binary Options Moving Averages
Most binary options brokers that offer technical analysis tools make it easy to set up a daily moving average feature. Typically, all you need to do is head to the indicators menu on the platform and choose the Moving Average option.
You can then set the details for the type of MA you want and the number of periods it will calculate for.
Other settings may also include changing the color of the line. You can also usually set multiple moving average indicators at once.
Simply save your choice and the moving average line should be added to your chart.
Pros Of The Binary Options Moving Average Strategy
- Beginner-friendly
- Reduces short-term “noise”
- Easily combined with other indicators
- Widely offered by binary options brokers and platforms
Cons Of The Binary Options Moving Average Strategy
- Not 100% accurate (false signals)
- Hard to find the optimal number of periods
- SMAs don’t put enough emphasis on recent prices
- MWAs and EMAs are more susceptible to whipsaws
- Can require confluence (use with other indicators) to build an effective strategy
Final Word On Trading Binary Options Using MAs
It is easy to see why moving average indicators are popular with binary options traders. They are versatile tools that can be used to represent trends without the noise of short-term volatility. They can also be helpful in other ways, such as using long-term MAs as dynamic support and resistance levels.
Coupled with their ease of use and availability, binary options moving average strategies are useful tactics for aspiring traders. Head to our list of the best brokers to start using the binary options moving average strategy.
FAQs
What Are Binary Options Moving Average Strategies?
They are simply binary options trading strategies that make use of moving average indicators. By taking previous close prices and finding the average, you can cut through the noise of short-term volatility and see the price trend of a security. A binary options moving average strategy can also be used to identify potential reversals in stocks, ETFs and other underlying assets.
How Do I Set Up A Binary Options Moving Average Strategy?
Our guide explains how to set up moving averages on your binary options broker’s platform. Firstly, you will need to head to the ‘Indicators’ menu. Here, you should find ‘Moving Average’. Selecting this option should take you to a menu where you can set the parameters of the moving average, such as the time period and type of MA. Save these settings and the moving average should appear on your binary options chart.
How Many Periods Should I Set My Moving Averages To When Trading Binary Options?
There are no exact period numbers that will deliver perfect results for every asset’s price action. However, popular moving average periods include: 10, 20, 50, 100 and 200 periods. Head to a binary options demo account to find the time filters that work best with your trading strategy.
What Is The Best Type Of Moving Average For Binary Options Trading?
The best type of moving average will vary between assets as well as market conditions and time period/binary options contract length. However, the most popular types of MAs are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). These are beginner-friendly and available at many of the top online binary options brokers.
What Time Frames Can I Use For The Binary Options Moving Average Strategy?
As a day trader using binary options, you can use a moving average strategy to trade short, 1-minute, 2-minute, 5-minute, 30-minute, and all the way up to 24-hour contracts. The trading system can also work with longer-term binary options contracts.