MACD strategy involves the use of two indicators: MACD and Stochastic. Using a combination of two indicators, the Binary Options trader significantly increases his chances of making a profit compared to a scenario where he uses them separately. After the analysis of data is obtained from both indicators, it is possible to know with a high probability when is the right moment to enter the market. By the way, we have tested the strategy here.
In our strategy, we will combine the 2 indicators mentioned above. First, let’s see what they represent separately.
Stochastic is one of the most prominent indicators that are widely used in technical analysis of financial markets, including Binary Options. Compared to other popular indicators, Stochastic is differentiated by its ease of use.
In essence, this indicator looks at an assets closing price and compares to the assets price for a specific timeframe. It works on the assumption that when a market is trending up, the assets price will close near the high and when a market is trending down the closing price will end near the low.
The Stochastic Oscillator has a value from 0 to 100. Here is the essence of the signal: the proximity to 0 indicates an oversold market, so you need to consider the Call option. Proximity to the level of 100 signals an overbought market, which is the right moment when the trader can look for a Put option. Most of your work with this indicator is directed to the search for the maximum and minimum values in the areas of overbought and oversold.
Oversold means that the asset price has decreased by a high enough volume to reach its lower limit. It is expected to soon rebound or pullback in the other direction.
Overbought means that the asset price has increased by a high enough volume to reach its upper limit. It is expected that it will soon pullback to the other direction.
The basis of this indicator is the use of the main line (K% indicator), which shows the current price position in comparison to the price range for a number of past periods. Generally, the basic configuration which is used is the period of 14 units, meaning K% equals 14%.
The main line of the indicator is used in conjunction with the indicator D%, which is a moving average line.
This indicator was invented in 1979 by Gerald Appel as a reference tool of time in the stock market. The MACD is good, but is not very widespread as a forecast tool due to some insufficiencies.
The indicator determines the direction and strength of the trend. But by using this indicator, our MACD strategy allows the determination of different entry and exit points in the Binary Options market.
We get the full picture with the addition of this signal line. If the value resulting from these manipulations is located above the signal line, it is regarded as a bullish move, meaning that we can expect growth of the price. This intersection occurs as a result of the sharp move which appears after the move of the fast moving average in relation to the slow one.
The principles of trading with MACD Strategy
In addition to the mentioned indicators, we will need to open an exponential moving average line on to our chart with a period of 200 (EMA 200). You should look for the intersection of indicators occurring not later than 2 candlesticks. The most important point is that Stochastic bullish or bearish cross should take place first. It means that we first estimate the signal from stochastic, then from the MACD.
It is recommended not to buy Call option when the price is found below the EMA (200), and not to buy Put option when the price is above EMA (200).
Here is how you should set up the indicators:
1. Stochastic – K% period – 13, D% period – 5, slowing – 3. Add the level 50.
2. MACD – Fast MA Period 12, Slow MA period 26, Signal MA period 9.
3. EMA – set the period 200.
We buy the Call option at the intersection of the stochastic and MACD lines, and they should be directed up. Stochastic should be below 50, and MACD above zero.
The main advantage of using MACD and Stochastic in this strategy is the ability to find trends. These two indicators are combined perfectly with each other, because each of them has its own range of application. Stochastic compares Close (closing price) with a range of prices for the desired period of time, and MACD ignores market jumps and drops.
The stochastic bullish signal occurs at the intersection of the K line with oversold or overbought levels, which portends a reversal in price. Almost the same effect we see using the standard MACD.
Both indicators work best from M15 and up.
Call option example with MACD strategy
Put option example with MACD strategy
Before you make use of this strategy, make sure you test it on your demo account first or by investing minimal amounts while learning and practicing.