One of the most classic sayings in technical analysis is “The trend is your friend”. All you need to do during trading is to identify market trends. From there, every action of opening options gives the highest probability of winning. That’s why today we will learn about MACD indicator.
MACD is one of the simplest indicators for you to identify price trends. In this article, I will make the MACD line simple. At the same time, I will show you 2 trading combinations using MACD.
Video on using MACD to trade Binary Options
What is MACD?
MACD stands for Moving Average Convergence Divergence. It was created by a technical analyst named Gerald Appel from the 1970s. MACD helps you figure out which trend the price is in. It also helps you identify when the trend ends, reverses, or converts to a new one.
The MACD indicator consists of three main elements.
– MACD (MACD line – dark blue line): is the combination of the EMA12 – EMA26, which shows the price development trend.
– Signal (Signal line – orange line): is the EMA9, used to track the price trend.
– Histogram column: is for measuring the degree of convergence/divergence between two moving averages. It shows whether the speed of price change at the given time is fast or slow.
How to use MACD indicator
Method 1: Predicting price trends accurately using MACD
This is the convergence characteristic of the MACD indicator. It means that the direction of MACD is the direction of price.
(i) When the MACD line crosses the Signal line from below (the blue line intersects the orange line from the bottom) => The price is trending up. Histogram columns will point up.
(ii) When the MACD line crosses the Signal line from above (the blue line intersects the orange line from the top) => The price is trending down. Histogram columns will head down.
Method 2: Predicting the possibility of reversal using MACD divergence
Another characteristic of MACD is divergence. You need to identify the divergence of the MACD line. From there, you can forecast the possibility of price reversal.
This is a typical example of MACD divergence.
(A) The price is in downtrend => (B) There is a divergence between price and MACD indicator (The price is falling but the MACD line is rising) => (C) Soon after, the price reverses from down to up.
Two trading combinations using MACD
Notes: MACD is a trend indicator. Therefore, the best way to trade is to combine MACD with other trend indicators.
Do not use MACD to open options against the trend.
Method 1: MACD indicator combined with Support/Resistance
Using MACD with Support and Resistance is a strategy with very high accuracy in binary options trading.
Conditions: A 5-minute Japanese candlestick chart. The expiration time of 15 minutes (time for a transaction is 15 minutes).
How to open an option:
+ Open an UP option: The price breaks out of the resistance and goes up. At the same time, the MACD line crosses the Signal line from below (the blue line intersects the orange line from the bottom)
Explanation: When the price breaks out of the resistance, the market will enter an uptrend. Besides, MACD also gives bullish signal => This is when you can confidently open an UP option.
+ Open a DOWN option: The price falls out of the support and goes down. At the same time, the MACD line crosses the Signal line from above (the blue line intersects the orange line from the top)
Method 2: MACD indicator combined with Heiken Ashi candlestick chart
Heiken Ashi candlestick chart is a very special candlestick pattern. It indicates exactly whether the price is in an uptrend or a downtrend.
When the green candles line up consecutively => The market goes up. Conversely, when the red candles line up consecutively => The market goes down.
Conditions: The 5-minute Heiken Ashi candlestick chart. The expiration time of 15 minutes to 30 minutes.
How to open an option:
+ Open an UP option: Heiken Ashi candlesticks pattern shows a series of consecutive green candles. At the same time, the MACD line crosses the Signal line from below (the blue line intersects the orange line from the bottom)
Explanation: These are two signs signaling that the price is in an uptrend. Therefore, opening an UP option will be extremely safe.
+ Open a DOWN option: Heiken Ashi candlesticks pattern shows a series of consecutive red candles. The MACD line crosses the Signal line from above (the blue line intersects the orange line from the top)
A few notes when using the MACD indicator to trade binary options
– A long expiration time is better than a short one (The expiration time of 15 minutes or more will be better than that of 5 minutes). MACD is a trend indicator. Regarding trendy trading, it’s best to choose a long expiration time.
– Do not use the MACD indicator only to determine entry points. Because sometimes MACD will not give clear signals.
– Please remember: Do not trade against the trend. MACD is to identify trends and we trade trendily. Never go against the trend.