Many mathematical systems have appeared during the last few decades, and these systems are designed to simplify the trader’s task of earning profit and risk’s minimization. All of these mathematical systems are the basis of trading strategies with a varying degree. The moving averages indicator can be referred to such systems too.
The Moving average indicator has several varieties, but its essence comes to the single point. A trader has to search points where a price can reverse in the opposite direction and follow the trend. On a chart this indicator can be shown as two lines which either move parallel to each other or cross in the particular points. If you look at this indicator closely, you can see that this indicator reverses in the opposite direction after the moving averages cross. The price acts the same way. When the indicators’ lines cross, the price reverses in the opposite direction too.
Types of moving averages
As mentioned above, now we will address the main types of the moving averages. So, the first one is called the simple moving average. It is really simple. In this moving average a period of, for example, 10 days is set, and then it will show the average price for the last 10 trading days. The longer a period of the moving average is, the smoother it will be.
Then, let’s consider the next time of the moving average, the exponential one. While the simple moving average is the lagging indicator, the exponential moving average allows slightly shorten the indicator’s lag from a price. This moving average is based on the more recent prices. In other words, the system prioritizes the recent price levels over the later one. It is important to remember that the exponential moving average allows not only smoothing the market’s oscillations, but reacts to the changes in the market fairly well too. For this reason, the exponential moving average is considered the best one among all types of this indicator.
The weighted moving average is, in fact, the same thing as the exponential moving average. In other words, the main focus of this indicator is on the recent price levels. But it is important to remember that this indicator weighs different types of data. By contrast with the exponential moving average, the weighted one reacts to the changes in the market very quickly and, for this reason, may send many false signals.
How to use moving average in binary options?
How do you apply this indicator in the practical binary options’ trading? Doing this is pretty simple. It is needed to use our live chart, set the indicator on it, and follow what it displays closely. As soon as the moving averages cross, you can prepare to buy an option in the opposite direction from the previous market’s movement.
For example, there was the ascending movement in the market for some time. The moving averages have crossed, sending the signal that the trend’s reversion in the opposite direction is possible. In this case, a trader can buy the Put binary option. But it is important to remember that when working with the Moving average indicator, it is needed to set its period in accordance with the trader’s opinion. Trader’s work effectiveness will depend up to this. The longer period aids in smoothening of the slight oscillations, but, at the same time, it makes the indicator the lagging one.
Therefore, the Moving averages are pretty popular indicators currently. They are applied in the majority of the technical analysis’ binary options’ strategies. They are so popular because they are relatively easy to use and effective.