A reversal can easily be seen on a price graph, where the line undergoes a recognizable change along its path. An uptrend, which is a series of highs, can reverse into a downtrend by changing to a series of lows. A downtrend, which is a series of lows, can also result to a reversal to an uptrend by changing to a series of highs.

A reversal can also be called a rally or a correction. The idea of momentum covered by two concepts, trend and volume. An asset price is said to have a great negative momentum if there the volume is great but a long put spread occurs. Inversely, an asset price has great positive momentum if there is a great volume in the long call spread.

In technical analysis, momentum is considered an oscillator and is used to help identify trendlines. Support is a level in a price history where the price of an asset tends to find break as it is going down.

However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level. Alternatively, support is the price level which, historically, a stock has had difficulty falling and is constantly level or rising.

It is thought of as the level at which a lot of buyers tend to enter the stock. Resistance is point or range of points in a chart history that limits an increase in the level of the price of an asset over a period of time. An area of resistance may denote that an asset price is finding it too difficult to break through, and may head lower in the near future.

The more times that the price value of an asset has tried to break through the resistance barrier unsuccessfully, the more formidable that area of resistance becomes.

Graphing moving averages can indicate trends. Trends are the most basic indicator that many binary options traders use. If a moving average shows that a price of an asset is continually going up, or an uptrend, then it must still go up in a certain, perhaps short period of time, and vice versa.

Say a trading day closed adding a new value 12 to our history. Once the new value of 12 is added to the set, the past 10 data points now includes the 12 and drops the first 8. The new count of 10 data points now start from 12, changing the sum. Because of the relatively larger value of 12 replacing the lower value 8, a binary options trader would expect to see the average of the data set increase. In our example, the SMA went from 8. After obtaining the different SMAs, they are plotted in a chart and connected together to create a moving average line.

You will be able to find these curving lines on charts that technical traders use. The Exponential Moving Average EMA is a type of moving average that gives more weight to recent prices to make them more responsive to new information. However, for purposes of discussion, the EMA equation is:. From the formula, we notice that when we calculate the first point of the EMA, there is no value available for the Previous EMA.

This can be resolved by obtaining an SMA and continuing on with the above formula for EMA. Traders usually use simple spreadsheets that are available in the Internet that includes real-life examples of how to calculate both a SMAs and EMAs.

Also, by looking at how the EMA is calculated, it can be found that more emphasis is placed on more recent data points, making it a type of weighted average. EMA responds more quickly to the changing of prices.

This means that for a certain time period, the EMA has already forecasted that a price would go down while the SMA would still need to go through more periods for find the prices falling. This responsiveness is the main reason why more binary options traders prefer to use the EMA over the SMA. The use of EMA charts has helped binary options traders forecast trends and directions based on moving average values.

The EMA is used in many strategies, so it is recommended to master reading EMA charts. How to use these values to set up trend forecasts is what many charting platforms provide. Some binary options brokers also provide charts that show moving averages. Establishing the trend can be quite straightforward.

Some traders will prefer to use different settings, for example they will use a 50 MA to establish smaller trends. Traders can also use two MA lines, for example a slower MA of and faster MA of 50 to establish a trend with each crossover of the faster MA.

So when the 50 MA crosses above the MA we say that the trend is up. See picture below. There are hundreds of books written on the subject of moving averages and crossovers. Traders all over the world argue and can not agree as to what is the perfect MAs setting for crossover signals. Known as the Golden Cross. Using fast MAs will produce more signals than when you use slower MAs. If you use a 15 MA and a 30 MA on a 5 minute chart you will have many signals a day, but it would be risky to trade on all of them.

While the Golden Cross has not yet been formally established, there were many tests done by trading companies which tried to establish this by the use of automated trading robots. The tests by ETE HQ revealed that the best Golden Cross MA settings within the tested period of time, which is important to indicate, were 10 MA and 50 MA both Exponential.

Here is a full result of the test:. A lot could be said about the various sets of crossovers but in the end the best settings will be those that you can work with to produce acceptable results.

Improve your binary options trading style by learning and implementing the moving averages strategy. Weve already talked about chart patterns and what their significance to technical analysis is. However, its really important to clear out that in most cases things arent as clear as in the examples weve presented.

In many cases there are lots of price fluctuations and different movements, making it notoriously difficult for an analyst to deduce the correct trend of an asset every single time. One of the most interesting methods traders use to mitigate the effects of this phenomenon is to apply moving averages.

Moving average is just a fancy way of saying that they calculate the average price of the asset for a predetermined period of time. This way they are able to observe the data more clearly, thus identifying genuine trends and increasing the probability of things working out well for them in the end. There are many types of moving averages, but three of them are the most popular, commonly known and most widely used.

These three types are simple, linear and exponential. There may be differences in the way the average is calculated, but the interpretations remain the same. Most of the variables come from the fact that there is different emphasis put on different data points.

In some cases more emphasis is placed on recent movements, while in other instances the price fluctuations of the whole period of equal importance. As the name suggests, the simple moving average SMA is one of the simplest methods to calculate the moving average. As such, it is also very popular and commonly used by many traders and analysts. The method is as simple as they get — in order to calculate a moving average using this method, one needs to take the sum of all the closing prices of the certain period and then divide it by the number of prices taken.

To make this more clear, heres an example. Lets say we want to calculate the moving average for a day period. In this case, we take the closing price of all 10 days, sum them together and divide them by This way the strength of the trends can be measured and become more apparent.

With all the illusions removed, the trader can make sound choices concerning his finances and not be worried about the outcome. Look at the example below and everything will make sense.

A large number of analysts and traders speculate that the data presented by the SMA is not detailed and relevant enough to be taken seriously. For them, recent price movements are much more essential and they believe that this aspect of the price movement should be given the proper attention and weight. Since simple moving average takes everything into consideration with the same importance, its easy to see why this argument would be held.

Certainly, for many traders, recent movements are much more important and if that is not reflected in the average, they feel the average, itself, is not accurate enough.

This is what lead to the creation of other methods of calculating the averages. Some experts strongly believe that the SMA isnt adequate enough to serve their needs, which is why they look elsewhere for reassurance. Where SMA is lacking in respect of relevance for these traders, linear weighted average more than makes up for.

The problem is solved by adding more emphasis on more recent data. This is done by introducing more complicated calculations. Instead of simply taking the closing prices, exerts instead take the closing prices for a period of time, then multiply the closing price based on its place in the chronological progression. For example, if we have a three day linear weighted average, then every day would be a data point, in which case we take the different closing prices and multiply them by the place of the data point.

The first days closing price will then be multiplied by one, the second by two and the third by three. Of course, if we were to choose a longer time window, the rules would apply all the same and it would not matter how many days weve picked.

This is the basis of the principle. Like LWA, EMA strives to put more emphasis on the more recent prices in the time frame. However, it does so in a bit more complicated and perhaps more refined manner, unlike the rudimentary nature of the LWA. To many the exponential moving average is much more efficient and preferred.

In most cases you dont even have to know how the different calculations are performed because the data is laid down for you in most charting packages, meaning that you wont have to compute the averages, yourself. Everything you require is laid down before you and all you need to do is make sense of it which can sometimes be a bit harder than it looks.

As a more advanced technique, EMA is used much more frequently used than LWA. Even though it has its critics, SMA is still very popular, leaving the LWA as the most rarely used of the trio. EMA is much more sensitive to new information than the SMA is. This is one of the reasons why it is preferred to the much simpler alternatives — because it delivers satisfactory enough information to many of the traders who employ technical analysis.

If you take a look at the same chart from two different perspectives — that of the SMA and that of EMA, you will notice that as the different values rise and fall, the EMA corrects itself much faster than its simpler counterpart.

The differences may be subtle, but they can be important enough to influence decisions in different ways. As weve already said before, moving averages are used to dispel any illusions and deceptive factors in the data. This means that their primary objective is to assist technical analysts and traders to more easily identify trends and make decisions based on a more general data.

Sometimes the information in the short-term can lead us to believe that the market conditions are different form what they actually are and moving averages help us to deal with possible misconceptions. They also help us to set up the levels of support and resistance, which are important as well, if you remember. Its easy to identify a trend based on the direction of a moving average. If a moving average is going up and the price is above it, then we are talking about a definite uptrend.

If, however, the moving average is going down and the price movements are below it, we can clearly see a downtrend. Another way we can determine a movement in a trend is to have a look at the relationship between two moving averages.

If we have a long-term average below a short-term one, then we are talking about an uptrend. If the short-term average is below the long-term average, then we are witnessing a downtrend. Moving averages can also help us spot trend reversals. There are two main signals for a trend reversal, both of them characterized as crossovers. The first one is when we have a crossover between the moving average and the price. If that should happen, then we are possibly talking about a trend reversal.

However, the signal is strong enough and accurate in enough cases as to require caution. If there is indeed a change in the trend, it will be reflected in the moving average shortly.

The other signal is the crossover between two moving averages. If we see this, then we can almost always be sure that there will be a trend reversal.

If the moving averages are both short-term, then we might be talking about short-term trend reversal. Logically, enough, if we see a crossover between two long-term moving averages, then this definitely speaks of long-term trend reversal. Just as crossovers are used to signal a trend reversal, moving averages can be used as a tool to determine the support or resistance levels.

Long-term moving averages are especially useful in this respect. There many cases when the price of a security would go down until it reaches the moving average, and then go back up. In this case, the moving average serves as a level of support. We know that the price will probably not break it and if it does, this signals of a trend so we will be prepared and will know what to do based on the current status of market.

They can help predict or confirm trends and give us a nice overview of the situation on the market. Home » Trading Strategy » Moving Averages Strategy for Binary Options. Chart Patterns for Binary Traders Moving Averages Strategy for Options Indicators and Oscillators. Binary Options Indicators How To Control Your Emotions Psychology of Trading. Author: btadmin. com is a financial media specialized in providing daily news and education covering Forex, equities and commodities.

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For example, the location of the quotes above the moving average that is moving up indicates an uptrend, respectively, the breakdown and the closing of the price candle over the removals is used as a signal for trading with a forecast of the rebound of quotations upwards: For this example, we use the IQ Options platform Deals are only in the direction of the trend. If, however, the moving average is going down and the price movements are below it, we can clearly see a downtrend. If a binary options trader wishes to see a day average instead, the same procedure would be made, but the sum would be divided into 50 to include the prices over the past 50 days. The Simple Moving Average SMA is the most commonly used MA. This is probably the most popular indicator when it comes to technical analysis.

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