The MACD indicator is another great tool you can consider when trading binary option. One of the easiest way to use the MACD indicator to trade binary option is the divergence. For the usage, you just need to use the default setting of the MACD indicator provided by your broker. In case some of you do not know what MACD divergence is, so please let me spend sometime to go through what a divergence looks like.
MACD, or moving average convergence divergence, is one of the favorite tools for binary options. It is useful in multiple timeframes, can be used with any asset and gives a variety of reliable signals. This strategy utilizes one of the standard divergence signals given by MACD for trading 15 minute charts. It is one of the quite reliable systems and is based on the standard MACD indicator. Actually, the divergence between MACD line and the currency pair rate is the basic signal in this strategy. This system has rather fuzzy entry and exit points, but it’s easy to spot the signal and the trades can be rather profitable, as it helps to catch the pull-backs and the trend reversals.
MACD Divergence Binary option Strategy
As a trader of binary options, you have to predict future price movements of an asset. Besides candlesticks, there are a number of technical indicators that can help you make successful predictions. A technical indicator is a mostly computer calculated data set a trader can use to come to predictions about the future direction of the market. One of the most popular technical indicators is the moving average. Learn about trading moving averages here, and improve your profit.
Divergences are an important tool for binary options trading and one employed by many intermediate and advanced traders. This tool can form in several ways and on several different indicators but the basic theory is the same for all. In fact, divergence theory is so well though of in the trading community that there is an indicator built entirely upon it, the MACD or Moving Average Convergence Divergence Indicator.
How Does The MACD Divergence Strategy Work
This strategy focuses on MACD divergences and seeks to capture the quick moves that come with corrections and reversals. The authors claim it is a “quick and reliable system and is based on standard MACD indicator”. I tend to agree with them but it does need a little tweaking. The system is based on a single indicator and a single signal, a practice I am not in tune with. However, combining the MACD divergence signal with another indicator like a Fibonacci, resistance line or EMA makes it much more reliable. So, what exactly is a MACD divergence?
Trading rules of MACD Divergence Binary option Strategy
Enter Long position when the price shows a bearish trend and MACD indicator shows a bullish trend.
Enter Short position when the price shows a bullish trend and MACD indicator shows a bearish trend.
Set stop-loss to the nearby support level, when going Long, or to the nearby resistance level, when going Short.
Set take-profit to the next resistance level for Long positions, or to the next support level for Short positions.
If the system generates a reversal signal — close the previous position first.
This is a semi-rare, contrarian signal that marks an impending market correction or relief rally. Looking at the shot of MACD above you can see that it is making a series of higher peaks followed by one lower peak. If those higher peaks were coincident with higher peaks in the market we would call them convergent. If the last and lower MACD peak happened while the market made a higher high we would call that divergent. When a divergence happens it signals that momentum is weakening and that the market is ripe for pullback, correction or relief rally. This MACD shot was taken from the USD/JPY daily chart, the divergence came just before a major correction.
MACD Negative Divergence
When the MACD indicator forms a lower high while the price forms a higher high, it is consider a sign of MACD negative divergence.
A MACD negative divergence is a sign that the price is going to move down soon and therefore as a binary trader, you can start to look for opportunity to go LOW.
MACD Positive Divergence
When the MACD indicator forms a higher low while the price forms a lower high, it is consider a sign of MACD positive divergence. A MACD positive divergence is a sign that the price is going to move up soon and therefore you can start to look for opportunity to go HIGH. The purpose of this divergence is to help you predict the movement of the price so that you can only enter trades that are in the direction of the predicted movement. This will greatly improve your winning probability.
Advantages of MACD Divergence Strategy
The great thing about MACD divergence is that it can happen in multiple time frames, be bullish or bearish, combines well with other techniques and it works with any asset with a price chart. These reasons add up to an indicator and system that definitely does not suck. Of course, I am biased because I love the MACD indicator and utilize divergence theory in my daily trading. This system uses the standard setting of 12-26-9, the same one I use. The signal is easy to spot with the suggested chart of 15 minute candles it will work well with expiry of 1-4 hours. For longer term traders simply move up to charts of one hour candles for end of day or end of week expiration and daily charts for one week to one month expiration.
Disadvantages of MACD Divergence Strategy
As written this strategy sucks. The signals are few and far between, unreliable and have vague entry points. The main reason for this is because it only uses one indicator and one signal. I find it odd that the main selling points of the strategy are also its main drawbacks. I mean seriously, the strategy is advertised as “easy to spot”, “only uses one indicator” and has a “high profit potential”. And they even admit that the entry and exits are “fuzzy”. Fuzzy may be good enough for you but I don’t like to trade on fuzzy signals, I like strong signals with easily identified entry targets.
The Bottom line
Divergences can and do indicate reversals as well. The nature of divergences does make it hard to pin point reversals but it can be done. In some cases the divergence will wind slowly down until the last peak is nearly zero but this is not always so. Usually there is a target of some kind that can be identified as a potential turning point. When the asset price reaches the target, along with divergent indicators, a reversal is more likely than at other times.
If you can find a divergence on a weekly chart, a daily chart and an hourly chart at the same time then odds are high that a contrarian position with a one hour to one expiration will pay off. Another way to maximize this strategy is to add other indicators to it. I like to use stochastic, trend line, Fibonacci and 30/150 bar EMA’s with my MACD. When these things combine to tell me a divergence could pay off it always pays to listen.