Exponential moving averages are often used as the starting point for trend following systems, and when it comes to trading binary options, following the trend will be your best course of action more often than not. Using a broad reaching EMA isn’t enough, though. Here, we will show you how to look at EMA, and then refine the process while applying it to your daily trading routine. As always, we will also show you the downsides of using this strategy and how to compensate for them.
Things to Think About When Using the EMA
The first thing that you need to do when using an EMA is to select a timeframe. This is completely dependent on what your binary options trading is like already. Traders that take a daylong approach find this method to be the most helpful. What we mean by this is that it is best when you look at where prices will be at the end of the day, rather than where they will be in a few minutes. Most charting packages will define the EMA at 50 days automatically, but as we are day trading, we want this to be a little smaller. 25 to 30 days is usually most effective.
We suggest using trades that expire at the end of the day for this to work. You can apply it to any type of asset, but stocks are where it will work the most effectively.
Your next step is to select a few stocks that are in a definite trend. Three is a good number, but skilled traders might want to go as high as six to eight in order to increase their range. Now, apply the EMA to their price chart. What you will find is a new line going through the price chart. What you’re looking for is crossovers. If the stock is in an upward climb, then you want to see where the EMA line crosses above the current price chart. This means that the stock is climbing faster than normal, and a call option should be initiated. If the EMA crosses below the line, do not trade that stock anymore. With stocks that are in a decline, when the EMA line crosses below the price line, initiate a put option. Prices are now falling faster than normal. If the line crosses above the price line, stop trading on it.
Your expiries should be for a few hours out, or the end of the day.
Things Do Go Wrong
EMAs were originally designed for long term trades, such as those a position trader would use, so they are not quite as accurate when applied to the day trading that most binary options traders employ. And when it comes to 60 second options, they border on random chance with their outcome. For this reason, if you focus on the very short term for your binary trades, such as with anything of 15 minutes in length or shorter, you will not find this method to be very helpful.
Another drawback is that unexpected events can always occur throughout the course of the day. Let’s say that you open a trade at 10 AM EST on Apple’s stock because a signal has determined that a call option is correct. You set the expiry for market close (4 PM). However, at 2:30 PM, a report comes out that Apple just lost a major contract, and the stock plummets, sending your trade into losing territory. There’s nothing that you can do to predict this, unfortunately, and the only way to protect yourself is to use a broker that allows you to end trades early at a partial loss.