What is a Moving Average?
There is no trader in this world not knowing what a moving average is and how to interpret it. Just in case there is still need to explain, a moving average takes the highs and the lows in a candle and then, depending on the period selected, projects a value that can be above, below, or right were current price is.
Of course, the bigger the period selected, the stronger the support and resistance area given as this is the main purpose of looking at a moving average.
The standard interpretation is that as long as price is above its moving average, this is a bullish situation and call options should be favored. The opposite is true as well: as long as price is below its moving average, put options are favored.
How to Use a Moving Average?
However, how to actually trade binary options using moving averages?
One way would be to use multiple moving average on the same chart and then to look for crosses between them as being bullish or bearish signs. For example, putting the MA200 (a moving average that takes into account 200 periods/candles), MA100, MA50 and so on a chart and then looking at crosses between them might offer a strong indication regarding the option to be traded.
How about the expiration date? Well, like in all cases involving technical analysis, it is much about the time frame you are analyzing as if you’re looking at the cross, let’s say, between MA100 and MA50 on the monthly chart, then it makes no sense to trade, say, end of day expiration date or hourly as the market will most likely take you out.
Moving averages are being used by all traders because they have a major advantage: are extremely visible. I mean, what can be more simple than a bearish environment but buy put options as long as price stays below a specific moving average in front of your screen or call options as long as price stays above that moving average?
Using Moving Averages when Trading
However, trading is not that easy. The first thing to do is to choose the period the moving average is set up. This period is key for the expiration date to be used with you option. For short term expiration dates, it is said that moving averages bigger than 20 periods are not giving many accurate striking prices, so hourly expiration dates should be recommended if the moving average is on a lower time frame chart like the five minutes chart.
The bigger the period the moving average is taking into consideration, the bigger the expiration date needed for trading the binary option.
Most popular moving averages are actually part of a whole trading system, with traders looking at crosses between the fast moving averages and the slow ones and these crosses to represent a change in the trading environment, either from a bullish to bearish market or from a bearish to bullish market.
However, markets are spending most of the times in corrective waves and this means that a system based on crosses moving averages make is a good one for identifying ranges. Range trading is as successful as trend trading and the only secret in range trading is to know when to expect one and this way both call or put options can be traded, as well as one touch or boundaries.
The 200 Moving Average
The 200 moving average is considered to be the most important one and therefore it represents a strong support or resistance level. It means that if market is below the 200 moving average and rallying right into it, the thing to do on the first test is to buy put options as most likely price will reject from that area. Multiple testing and retesting of the 200 moving average signals a break is imminent and by the time market is breaking above, like any support/resistance area, previous resistance turns into support and call options should be bought on any retest.
When moving averages like the 50, 100 or 200 are crossing, it is being said market is forming a golden cross, and this signals a bullish environment, or a death cross, signaling bearish conditions. In the first instance, buying call options on any dip after the gold cross is recommended, while in the second instance put options on any dip are recommended.
Moving averages are extremely popular in trading in general and in binary options trading as well and the period a moving average is taking into consideration can be custom as well as there is no need for the average to be 50, 100 or 200. There are also different types of moving averages, like exponential ones (EMA), for example, or simple ones (SMA) but in the end they all show the same thing.