Name of the MACD binary options’ indicator means convergence and divergence of moving averages. This one indicator can be referred to the category of complicated averages because it improves the visual perception of moving averages. There is an opinion that this binary options’ indicator reduces weaknesses that are common for moving averages.
MACD: basics of indicator’s plotting
There are two ways of how this indicator plots. It can belong to both linear and histogram types. At the same time, a histogram can be referred to the oscillator’s category. As for calculations of this indicator, they occur by the following way. The linear MACD of the moving average is calculated as the difference between the exponential moving average with a smaller period and the same line with a bigger period. In the majority of cases, the result received after deduction is smoothed using the exponential moving average. As for the indicator’s setting, they are the following by default:
- ЕМАs – short exponential moving average that has period 12 (two weeks)
- ЕМА1 – long exponential average that has period 26 (one month)
- ЕМАа – this exponential moving average is used for smoothing and has period 9
The calculation of a histogram is carried out in the following way. The signal line is deducted from the line of the MACD indicator. Currently, there is some sort of confusion in descriptions of MACD and MACD histogram indicators on the Internet. This problem is caused by the fact that these indicators have similar names.
MACD binary options’ indicator is visually represented by two lines on a chart. The first one is the line that is obtained as the result of deduction of moving average with period 12 and moving average with period 26. The second line is the signal one. In the majority of cases, the standard MACD indicator of binary options is represented on a chart in the form of a histogram. And the smoothing moving average is drawn in the form of a line. A neutral line, which shows the equilibrium price level, is located in the middle of the indicator. When the indicator is located above the neutral line, it means that the short-term prices are growing in relation to the long-term prices. The opposite situation occurs when the indicator is located below the neutral line.
As for the MACD’s histogram, it shows the distance between the signal line and the MACD line. This distance is represented in the form of a histogram. If the indicator is located above the signal line, then the histogram has a positive value and is drawn above the neutral line. If the indicator’s line is located below the signal’s line, then the histogram is located in the negative zone below the neutral line. When the indicator and the signal line cross, the histogram becomes equal to zero.
When the disparity between the MACD binary options’ indicator and the signal line expands, the histogram expands too. The histogram narrows when two lines become closer to each other.
The MACD indicator is one of the most popular and accurate in terms of the market signals’ determination. Traders who use it in their trading strategies have better chances for success. We are considering the main points of the work of this binary options’ indicator in this article. We will consider the description of the MACD binary options’ indicator in the next section.
MACD indicator: description
We have considered the common features of the MACD binary options’ indicator in the previous section. Now it’s time to consider its description and trading signals.
When the new extreme point (minimum or maximum) appears on the signal line of the MACD binary options’ indicator, it means that the trading signal may appear soon, and you have to prepare for the purchase of a binary option. If this indicator is located above the neutral line, the ascending movement prevails in the market. And the crossing of the neutral line from down to up sends a clear signal to buy the Call binary option. As for the strength of such signal, it directly depends up the previous movement of the binary options’ indicator. If the binary options’ indicator had been above the neutral line for a long time and then started to decline and crossed the neutral line from up to down, you can buy the Put option. But if the indicator was located below the neutral line for a few weeks, then its growth over the neutral line and further decline can be considered only as the retracement.
When the MACD binary options’ indicator is located below the zero level, there is the descending trend in the market. If the linear indicator crosses the neutral line from up to down, the stable signal to buy the Put binary option appears. In this case, the time of the indicator’s stay below the zero level is of great significance.
The MACD binary options’ indicator can be also used within the divergence trade. When the bearish divergence is forming in the market, you can consider buying the Put option. The new maximums are still forming on the price chart, while the new maximums are becoming lower than the previous ones on the indicator. In this case, the quick reverse from the ascending to the descending trend in the market is possible. But this divergence can show only the possibility of the trend’s change. For this reason, the experienced traders recommend to wait until the confirmative signals are received. For example, breakout of the trend’s line can belong to such signals. It is necessary to note that the divergence doesn’t belong to the frequent signals sent by the MACD binary options’ indicator.
When the bullish divergence is forming in the market, a trader can consider buying the Call option. In such situations prices continue to form the new minimums on a chart and the indicator forms minimums that are higher than the previous ones. As with the bearish divergence, in order to buy binary options, it is best to wait until the confirmation of a signal. The breakout of the trend’s line can be such signal.
There are situations in the market when several divergences appear on a chart in a row. These situations have to be interpreted the same as the general divergence. But these multiple divergences turn out to a stronger signal that the trend may reverse soon.
If the linear indicator is located lower than the zero level and crosses the signal line from down to up, the signal that the market can begin growth soon appears. In the opposite situations, when the linear indicator is located above the neutral line and crosses the signal line from up to down, there is the probability that the trend will switch to the descending one.
If there is the sideways movement (flat) in the market and the binary options’ indicator MACD reaches its maximum, it means that the short-term showings have deviated from the long-term showings substantially. This is the weak signal to buy the Put binary option. If the indicator reaches its minimum during the sideways movement, the weak signal to buy the Call binary option appears.
MACD histogram: binary options’ indicator
Specialists in the field of the financial markets, for example, Elder, believe that the MACD histogram binary options’ indicator provides the best insight into the correlation between buyers and sellers in the market. The primary benefit of this indicator consists in the fact that it provides the best image not only of the correlation, but also of the strength of each group and rate of how the overbalance in the certain direction changes.
As for the histogram’s inclination, it shows the balance of strength. If the histogram is inclined up, then buyers become stronger gradually. The same can be applied to the histogram’s inclination downwards. In this case, sellers become stronger. If the inclination is located in the negative zone and changes in the upwards one, it sends a pretty good signal to buy the Call option. If the histogram is located above zero and the inclination changes downwards, then you can buy the Put option.
If the ascending trend is observed on the binary options’ chart, but, at the same time, the MACD binary options’ indicator shows that the buyers’ strength weakens gradually, you have to consider the purchase of the Put binary options. If the situation is totally opposite to the previously described one and the MACD histogram binary options’ indicator is growing in the descending market, you may consider an opportunity to buy the Call option.
In a number of cases the histogram reaches its peak before the market reaches its maximums and minimums. For this reason, we can say that this indicator can be referred to the leading indicators’ category. When peaks appear on a histogram, it is recommended to consider the opportunity to buy binary options. For example, when the histogram of the MACD binary options’ indicator reaches its maximum value, it is recommended to consider the possibility of the Put options’ purchase. But in this case it is necessary to take into account that the expiration time can be somewhat longer because reverse of the market can occur later. This is because a price on a chart has not yet reached its peak value after which it will reverse downwards. The same can be applied to the situation when the histogram of this auxiliary tool reaches its minimum. We can consider buying the Call binary option. Nevertheless, as in the previous case, you have to take into account the fact that a price has not reached its bottom peak yet, and after this peak it will reverse with a high probability.
There are situations when the histogram of the MACD binary options’ indicator reaches its maximum values in the growing market. In these situations, the market stays in its ascending stage and there is a high probability that the next maximum on a chart will be higher than the previous one. In this case, it is recommended to continue working according to the trend, in other words, it is recommended to buy the Call option. If the binary options’ indicator has reached its minimum value in the declining market, it is probable that the price will reach its new minimum. In this case, the best thing to do is to continue working according to the trend and buy the Put option.
Among the disadvantages of this indicator we can call that the MACD and the MACD histogram send a pretty generous amount of false signals, especially regarding the intraday time scales. For this reason, the best way to use this indicator is during the mid-term or the long-term trade. As for the linear indicator, it lags frequently. Ideal settings for this indicator do not exist. If the period decreases, a greater amount of false signals is sent. If the number of periods grows, then many signals are lost by the indicator.