One of the first trading strategies that any new trader will likely learn is some variation of a moving average crossover strategy.
The main reason why this is so popular with traders across all assets is that it is both reasonably reliable but ultimately very simply to execute. Binary options traders have successfully employed the crossover strategy in the same way that both forex and stock traders have previously done, allowing for relatively low risk trading and the comfort of a high probability that the trade will be successful.
How to set up the MA crossover trade
If keeping is simple is the golden mantra of trading then this strategy is just about as simple as it gets.
The Moving average crossover strategy relies on just two individual indicators in order to generate higher or lower trading signals which can be interpreted as purchasing binary options either short or long. Since Moving averages can vary, choosing the number of bars to be incorporated in the moving average is critical to generating accurate signals.
It is generally assumed that binary options traders will need a ‘slow’ moving average such as the 20 or 22MA and a ‘fast’ moving average for which the 5 or 6MA are considered good examples.
When these two moving averages are applied to any price chart, on any time frame it is instantly recognisable that they often come together and move apart as the price rises and falls. Looking closely, the MA’s also cross over, with the shorter MA weaving in and out of the slower MA line.
It is these crossovers between the slow and fast MA’s which generate the buy or sell signals.
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Applying the crossover strategy to binary options
For this strategy to be most effective, binary options traders are encouraged to use the crossovers of the 5MA with the 20MA in order to find potentially profitable trades.
It is worth bearing in mind that a moving average is also a ‘lagging indicator’, meaning that it will often be behind the market and therefore the entry signal may occur after the market has moved higher or lower.
Whilst it would be ideal to be able to enter the market before an initial move up or down, a quick look at any price chart will show you that price will often stay consistently above or below the entry price as the options expire in the money.
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Remember, unlike forex trades, we are not looking to find the perfect entry in order to gain as many pips as possible but only for the price to remain above or below the entry price until our options expire.
Tips to make the MA crossover strategy more successful
Some important factors to take in to account when trading an MA crossovers include choosing the correct time frame.
Whilst the sixty second binary options may be the most exciting option, this strategy works best with the higher time frames such as the 30 minute or 1 hour charts. Additionally, waiting for a confirmed crossover will mean waiting for the previous bar to close before purchasing options in the direction of the crossover.
This is helpful because moving averages are lagging indicators and will only become fixed once the current bar has closed.