Making accurate speculations without using a technical indicator is not possible. That’s because indicators help in identifying the mood of the market.
Among the popular indicators used by binary options traders, MACD is one. It is used for making a winning trade after understanding the movement of the market.
Although MACD is a widely accepted technical indicator, you cannot use it properly if you are unaware of its fundamentals. Also, you must know about different trading strategies.
This guide has explained the MACD indicator in detail.
What is a MACD indicator?
MACD, Moving Average Convergence Divergence, is a reliable indicator used for trading trends. This powerful indicator is used for calculating the connection between two EMA, i.e., exponential moving averages.
Gerald Appel, in the 1970s, created this trading strategy. It is not primarily used for knowing the overbought and oversold conditions in the trading market. Instead, it appears as lines on the chart. These lines are the MACD lines that are a result of the calculation.
The obtained lines are as follows: the signal line (red line), the MACD line (blue line), and a histogram (green). The sum of the two moving averages results in MACD lines.
The result is obtained by subtracting the 12-period EMA (fast) with the 26-period exponential moving average (slow). On the other hand, the 9-day exponent average of the MACD line is the signal. Lastly, the histogram is created by calculating the sum of MACD minus signal line.
One thing that you need to notice here is the direction of the asset. If the asset strongly moves in a particular direction, the MACD hologram will increase. However, during asset price reversal, the hologram will shrink.
The MACD indicator is considered an oscillator because line waves in and out around zero lines. This thing resembles an oscillator. If two lines oscillate on the trading chart without any boundaries, this indicator will come into action.
After analyzing the obtained data, one can use this indicator. While trading, if you notice that the MACD line crosses below the signal line, sell the asset. However, if the line crosses above the signal line, you can consider buying the asset.
Another interesting thing about this indicator is that one can explain it in multiple ways. But convergence and divergence are the standard methods commonly used.
In simple words, you can see Moving Average Convergence Divergence as a technical indicator that comes in handy while spotting a trend. It is also used for knowing about short-term trend direction. So, if any trader uses this indicator for binary options trading, they can win a huge payout.
Interpretation of MACD
The MACD indicator is pretty straightforward. It does everything that its name suggests. This indicator helps in identifying profitable periods in the market. The profitable period arises when the trends are either diverging or converging.
Convergence takes place when the price of an asset travels in the same direction as the asset. Similarly, if it travels in the opposite direction, then it’s called divergence.
Also, when the EMA and indicator are traveling together, it results in convergence. In contrast, the short-term EMA above the long-term indicator results in divergence.
Similarly, if the MACD indicator is above or below zero, you can conclude two things. The first is if the indicator is above zero in the bullish sign, that means the short-term and long-term moving averages are traveling away in an uptrend direction.
However, short-term EMA diverges away from the long-term moving average in the downward direction in the bearish sign.
You can further include the signal line and histogram to understand market movement clearly. After including the lines, if the histogram is positive, the MACD is below the nine-period moving average. However, the MACD travels in the opposite direction when it is above the moving average.
How moving average convergence divergence works?
Here are a few things that you must remember while trading binary options using the MACD line.
To create a bearish trading environment, the MACD must turn down from above zero. But in the Bullish environment, the opposite happens. Also, a trading environment is considered bullish when the MACD line crosses the signal line from down to up. Here, zero below the MACD line indicates a strong signal.
However, if the line crosses from above to below, it’s bearish. In this case, zero above the MACD line shows a strong signal.
Also, remember that you must avoid trading if the MACD whipsaws. In such a situation, the trading market gets volatile. That means it’s unpredictable. Thus, speculating the price movement gets difficult.
MACD indicator for 60-seconds trading
One of the best things about the MACD indicator is that 60 seconds traders can use it. But for doing that, you need to modify a couple of settings.
The default configuration will be short-term (12), long-term (26), и MACD periods (9). You should change this setting to short-term (9), long-term (20), and MACD period (3).
Along with this, you will be required to set the MACD line as the mainline in the trading chart. Moreover, set the signal line as a white line. After doing this, you are likely to encounter the following situations.
If you want to buy a put option:
- Make sure that the red line, i.e., MACD mainline, crosses the white line, i.e., the MACD signal line. And this should happen from above to below.
- Moreover, the candlestick should be above the cross-spot. It must be in the direction of the MACD mainline. It’s a bear trend bar.
If you want to buy a call option:
- The red line must cross the white line. But the crossing should take place from below to above.
- Lastly, the candlestick must be above the cross spot in the direction of the MACD mainline. It’s a bull trend bar.
Best Binary Options MACD indicator strategies
You can also use some excellent trading strategies to increase your chances of winning trading by using the MACD indicator.
MACD indicator and Bollinger Band trading strategy
One can create a reliable trading strategy by mixing MACD with Bollinger Bands. The highlight of this trading strategy is its ease of use. As a 60 seconds trader, you can quickly use it to obtain better results.
Not to mention, one can use the MACD indicator and Bollinger Bands trading strategy in any direction for reducing the risk of the trade.
While it’s an excellent trading strategy, you must avoid using it if you are not interested in making 60 seconds trade. That’s because this tool is not ideal for identifying trading market trends.
MACD + Relative vigor index
If you want to know the overbought and oversold condition of the market, you must combine MACD with the Relative Vigor Index. Well, the Relative Vigor Index tells about an asset’s price range to its closing price.
So, use the MACD indicator to match the crossover. Remember that if both the indicators are pointing in the same direction, you can make a trade. After buying or selling the asset, you can wait until the MACD signals to close the trade.
MACD momentum divergence
This strategy comes in handy when the actual price movement of an asset is different from the one that the MACD indicator has predicted. When this situation arises, you can understand that the momentum in the market will soon disappear.
Wait for a divergence between the underlying price and the MACD indicator to make a successful trade. After that, identify the type of divergence because it is of two types, i.e., bearish and bullish divergence.
In bearish divergence, the indicator records lower highs, but the asset price has higher highs. However, in the bullish divergence, the MACD indicator shows a higher low when the price of a commodity travels low.
MACD 0-line crossover
This trading strategy comes into action when the asset travels from the positive momentum to the negative momentum. One can use this strategy even in the opposite trading situation.
The difference between these two situations is bullish and bearish. The bearish sign, i.e., bearish crossover, occurs when the line crosses from positive to negative. However, a bullish sign, i.e., the bullish crossover, is when the MACD line crosses from negative to positive.
But there is a catch. It is that the 0-line crossover does not always indicate a momentum switch.
MACD signal crossover
Another excellent MACD trading strategy that is widely used in binary options trading is the MACD Signal Crossover. Here, you can notice two kinds of crossover, i.e., bearish and bullish.
A bullish crossover happens when the line goes above the signal line. In contrast, a bullish crossover is when the MACD line is below the signal line.
MACD + money flow index
The last trading strategy that you can create is by combining MACD and Money Flow Index. The best way to use this strategy is by combining MACD crossover with overbought and oversold.
It would be helpful if you waited for the bearish cross when the money flow index shows overbought. However, you must wait for a bullish cross if the index shows oversold.
MAD indicator for day trading
Just as 60 seconds trade, the MACD indicator is beneficial for day trading as well. So, if you are an avid day trader, you can check the asset’s volatility with the help of MACD. Also, this indicator works perfectly fine on different time frames.
While there is no right time frame for using MACD, you can find one by analyzing the asset, type of trade, and instrument. This way, you can effectively do day trading and win a huge payout.
Advantages of MACD indicator
Moving Average Convergence Divergence is an excellent technical trading indicator, and the reasons mentioned below explain why you must trust it.
- Unlike other indicators, this one provides straightforward buying and selling signals.
- You can combine the MACD indicator with other indicators to generate a clear and accurate result.
- Lastly, this indicator can be used as a momentum and trend indicator.
Limitations of MACD indicator
While the advantages of using the MACD indicator are never-ending, this tool also has certain limitations. Here are a few of them.
- Divergence usually signals a possible reversal. However, no reversal happens. That means MACD produces false positives.
- The divergence does not predict all the reversals. That’s because it speculates too many false reversals.
- The indicator does not have an accurate analysis of trend lines.
How can a MACD indicator be used?
If you want to win a considerable profit, using the MACD indicator with the authorized broker is essential. But how will you find a trustworthy trading broker? Well, that’s simple. Check the minimum trading amount, demo account availability, minimum deposit amount, and features offered.
Not to mention, check the license of the broker. If some trusted authority does not regulate it, you must not trade with it. After all, the binary options trading scam has increased, and it’s not wise to risk the money by trading with some shady trading platform.
MACD indicator vs. RSI
One might get confused between Relative Strength Index and Moving Average Convergence Divergence, thinking they are the same. But it’s true. While there are some similarities, there lie specific differences as well.
To begin with, Moving Average Convergence Divergence shows the relationship between EMAs. However, the Relative Strength Index shows the market overbought and oversold compared to the current price levels.
As you have reached the bottom of this post, we assume that you might have gone through the suggested MACD indicator trading strategies. You can either use the suggested strategies or create one depending on your trade style and type of asset.
MACD indicator might sound a little complicated initially, but once you have understood its concepts, you can use it to increase your chances of winning a trade.
But when you are using this indicator, don’t overlook the limitations. Instead, consider them and trade accordingly to keep yourself safe from making bad trades.