Trading the MACD with Binary Options

Screen Shot 2014-06-17 at 11.12.19

 

Video Transcription:

Hello, traders. Welcome to Day Trading Binary Options. Today, we’re going
to teach you, and you’re going to learn of course, how to trade with the
MACD. The MACD stands for moving average convergence/divergence. This is a
trend-following indicator and momentum oscillator that uses two moving
averages to create buy and sell signals. It also uses a histogram to show
you how momentum is building, either to the upside or to the downside. The
slow moving average is the actual MACD line, which is calculated by
subtracting the 12-day moving average from the 26-day moving average. The
fast moving average is a simple nine-day moving average of the MACD.

Now, I know this sounds a little bit complicated, but you need not to pay
attention to the actual calculations of the MACD line and the trigger line,
because what you need to understand and what you need to actually learn are
the actual signals that the indicator will give you. Okay? Now, the slow
moving average is the MACD line, and the fast moving average is the trigger
line. When we actually see the signals that we are talking about, you will
understand why we call the fast moving average the trigger line. Now, the
histogram report says the difference between these two moving averages or
lines and the closer they are together, the less momentum or volatility
there is in the markets.

Convergence occurs when the moving averages move towards each other. This
means that there’s less space between the moving averages, which means that
there is less momentum in the market, and you will see it on the histogram
because it will not build up either to the upside or the downside. Now,
when divergence occurs, it means that the moving averages are moving away
from each other. This creates volatility in the markets, and you will see
it reflected on the histogram because you will see it build up. Now, let’s
see the first kind of signals that we are going to look at. They are a
simple moving average crossover signal. Okay?

When we’re talking about moving average, of course we’re talking about the
MACD line and the trigger line. Now, a bullish signal occurs when the
trigger line crosses above the MACD line. This is why we call it the
trigger line, because when the faster moving average crosses above the
slower moving average or the MACD line, we have a trigger to buy calls in
this case because these are bullish signals. Okay? The trigger crosses
above the MACD. We have a signal, but we also need to pay attention to the
histogram because we need momentum building to the upside. If we don’t have
momentum building to the upside, we can be cutting the range or in a very
choppy market. Even though we have a crossover, a trigger above MACD
crossover, our trade or our option might expire out of the money because we
don’t have momentum that moves price to our side.

Now, this is an example of a bullish signal with the moving average
crossover. In this case, we are looking to buy calls because we have a
bullish signal. Now, this is a price action chart, and you can see that
price is caught inside this range. Here are the lows, and here are the
highs. Okay? Now, we have a correction to the downside from these highs,
and we are now ranging or chopping here at support, at previous lows. Now
that we know that we are at support, and we see that price is rejecting
support, we go to the MACD. Okay? You can see that we had momentum to the
downside because the histogram was built into the downside. But once we
reached support, it actually started to build to the upside. Okay? We have
here, the blue line is the trigger line or the fast moving average, and the
orange line is the MACD line or the slow moving average. In this case, we
have a crossover right here. As you can see, the trigger line crosses above
the MACD line, and we have momentum building to the upside. When we clear
the previous highs of the down-move, we have a clear signal to buy calls.
You can see that because we had momentum to the upside, the move is very
strong, which means that our option will expire in the money. Okay?

Now, this is the kind of buy signals that you will be looking for with the
trigger line and MACD line crossover. Now, let’s have a look at a bearish
signal. Okay? This is the complete opposite. A bearish signal occurs when
the trigger or faster MA crosses below the MACD line or slower moving
average. Of course, we have to pay attention to the histogram here too,
because if we don’t have momentum to the downside, there’s a high
probability that our option will expire out of the money because we will be
trading in a nonvolatile environment, which means a chop market. Now, this
is an example of a bearish signal with a moving average crossover. Here, we
are looking to buy puts because it is a bearish crossover. When the trigger
crosses below the MACD, it’s a bearish crossover. So we’ll be looking to
buy puts. Now, here’s an example of a trending market. We can see that we
are moving strongly to the upside, and we have reached a turning point, or
what we think can be a turning point. Right?

Now, we have here an area that was tested as resistance and was broken to
the upside and was tested as support right here. When we break with support
and, of course, we have the MACD crossover . . . I’m sorry . . . the moving
average crossover, which means that a trigger line crosses below the MACD
line and we have momentum building to the upside, we have a signal to buy
puts on this instrument. You can see that the continuation of the flush is
massive. So our option will have expired in the money. It doesn’t matter if
we are looking at a daily chart or a 50-minute chart. These crossover
signals work in any timeframe and with any instrument you want to trade. Of
course, you have to be very patient because you will not trade every
crossover, because you need momentum. Okay? If you don’t have momentum or
if you don’t see that the histogram is building to the upside or to the
downside in either case, you will not take the trade. Okay?

Now, let’s have a look at the second kind of signals that we will be
learning today. These are called the centerline crossover signals. A
bearish signal occurs when the MACD line crosses below the centerline. In
this case, we’ll be only looking for MACD line crossovers with the
centerline. Okay? The centerline is the line that divides the upside from
the downside of the histogram. We will be looking for bearish crossovers,
which means that the MACD line crosses below the centerline, or bullish
crossovers when the MACD line crosses above the centerline. The signal has
to be used in confluence with support and resistance lines. Okay? Of
course, if you don’t have momentum, it will be very difficult to take the
trade because there will be no volatility to push price in your favor. You
have to remember that this is very, very important. Now, here’s an example
of a bearish signal with the MACD crossover. Here, we are looking to buy
puts because we are in a bearish crossover. Here’s an example of a price
action chart. Okay? You can see that we have a clear uptrend from this low
to these highs that are tested twice. Now, we move to the downside, and we
test this area of support and we rejected it. Okay? We are still in bear
country, even though we have volatility to the downside, but we have no
clear signal to take a trade just yet.

When the previous lows are broken right here, and the MACD crosses below
the centerline, and we have momentum building to the downside, we have a
signal to buy puts in this instrument. You can see that we have a clear
reversal of price action when this happens. Now, let’s retrace what we just
learned here. We have a clear option. than price comes back to test these
highs, which are also an area of support. We reject this area of support
here. When we break below and we have MACD crossover or, should we say,
when the MACD line crosses below the centerline, and we have momentum
building to the downside, we have a clear signal to buy puts in this
instrument. You can see that even though we came back and retested the
previous support area as resistance, the flush is imminent, and our option
will expire in the money.

Now, let’s have a look at the bullish scenario. A bullish signal occurs
when the MACD line crosses above the centerline. Okay? The signal has to be
used in confluence with support and resistance lines, just like the bearish
centerline crossover signal. Now, this is an example of a bullish signal
with a MACD crossover. Here, we will be looking to buy calls because we are
in a bullish crossover, which means that the MACD has crossed above the
centerline. You can see that we are in a clear downtrend, here in this
price action chart. We have hit an area that is a low here. Now, we are
testing the previous highs right here. When we break with the previous
high, and we have a MACD crossover and momentum building to the upside, we
have a clear signal to buy calls. On this reversal, our option will also
have expired in the money.

Now, as you can see, you have to be patient because in here, we did not
have a clear signal to buy calls just yet. We had to wait for the actual
MACD crossover. Even though we had momentum building to the upside, we
weren’t able to go further to go above this high on two occasions, until we
broke with a very strong move to the upside when we actually crossed above
the centerline. These are the last kind of signals that you will learn.
These are called divergences. A bullish divergence occurs when the MACD is
making higher lows, and the price action or the price chart is making lower
lows. This we’ll call our divergence, because the instrument shows one
thing, which are higher lows, and the actual price action or the actual
price chart shows another thing. They diverge.

Now, this is an example of a bullish divergence. When we are in a bullish
divergence, we are looking to buy calls at the end of a down-move.
Divergences are very strong reversal signals. Remember this. Now, you can
see that here we were in a clear downtrend and actually a very strong down-
move, and we hit a low here. Okay? You can see that we’ve started trading
inside a range, and we made a new low here, which is a lower low. Okay?
Here, we have met the first rule for a divergence, for a bullish
divergence. Price is making lower lows. If we go to the MACD, we can
actually see that when price makes this low, the MACD makes this low right
here. When price makes this low, the MACD makes a higher low, which means
that the instrument and price are diverging from the lows that they are
making. This is called a bullish divergence. Okay? At the end of a
downtrend . . . Remember, these are the end of a downtrend. You will be
looking for a lower low on price and a higher low on the MACD. The trigger
happens when we take out the previous highs, and we have momentum building
to the upside. Here, we even tested the previous highs and support before
moving all the way up here on a very strong reversal and continuation of
the up-move.

So as you can see, bullish divergence is a clear bullish or clear signal to
buy calls on any instrument that you wish to trade. On the other side, we
have bearish divergence. Well, it’s not the opposite, because we are not
looking for the lows in price and on the MACD, but we are looking to buy
puts. So the thing that we are looking here for a bearish divergence is
actually the MACD making lower highs and price making higher highs. Okay.
Once again, remember that these signals are reversal signals. So bearish
divergence will be found at the top of an up-move. So if we are at the top
of an up-move, we will be looking at the highs of the move. Okay? If we are
looking for a bullish divergence, we will be looking at the bottom of the
move. So we’ll be looking at the lows. Okay?

Now, in a bearish divergence, we are looking for price to make higher highs
and the MACD to make lower highs. Now, here’s an example of a bearish
divergence, where we are looking to buy puts when we get the actual signal.
Here’s the price action chart. As you can see, price is clearly making
higher highs at the end of this option. We made this high. Then we made a
correction to these lows, and we made a higher high. If you draw a trend
line from this high to this high, you can see that we are making higher
highs here on the actual chart. If we go to the MACD, you can see that
here, when price made this high, we made this high. When price made a
higher high, the MACD actually made a lower high, making this a bearish
divergence.

But remember that not because you have a bearish divergence you will be
buying puts immediately. No. You need a trigger. The trigger for
divergences is . . . Well, the trigger for a bearish divergence is the
actual breakout of the lows, of the previous lows. Now, here we have the
previous low, which is also an area of resistance right here. When we break
below, we even retest it as resistance. When momentum builds to the upside,
we have a reversal and a continuation of the down-move. Now, how to trade
with the MACD. Let’s review how you trade with the MACD. Now, you know all
the signals. Okay? First of all, you always wait for the completion of the
signal for them to be valid. Remember that you need the previous highs or
previous low to be broken, either with a centerline crossover or with a
divergence. Okay? You need support or resistance to be broken with a moving
average crossover because you need momentum, either to the upside or to the
downside. Of course, you will be looking always at the histogram for
momentum building to either side.

Always use support and resistance levels, as well as previous highs and
lows, for triggers. This we already said. Divergences are very powerful
reversal signals, but they are better . . . they have a better winning
ratio on higher timeframes. Now, this is something that you need to
remember. Even though we’ll have divergences on any timeframe, any signal
you will learn on this course will have a higher winning ratio on higher
timeframes. This is because the signals of the higher timeframes are less
usual. To put it another way, you will get less signals on the higher
timeframes, but they will be more accurate. Okay. But it doesn’t matter if
you have a better winning ratio on a higher timeframe than on a lower
timeframe, if you don’t have enough patience to wait for the completion of
the signal and get the trigger. Your winning ratio will not be very good.
Remember that the MACD, by itself, can be a very profitable strategy for
day traders.

Adam

More About

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

View Posts - Visit Website

Comments are closed.