In this article, we will discuss a fundamental element in financial markets, often referred to as the “dinosaur” of trading. It’s safe to say that virtually every trader, regardless of their experience level, is familiar with MACD, an indicator that has cemented its role as a steadfast companion for many in the world of finance, serving as an integral component of their trading strategies.
Remarkably, this indicator has also proven its mettle in the binary options market, despite not being originally designed for electronic contract trading. Let’s start by unraveling its cryptic name: MACD stands for “Moving Average Convergence/Divergence”. This nomenclature alone hints at its reliance on moving averages for its formula, though we’ll delve into the specific settings shortly.
The MACD owes its existence to the diligent efforts of stock trader J. Appel, who first began employing it on the stock exchange way back in 1979. Since that time, it has retained its popularity and remained a cherished tool among financiers.
You’ll find “Moving Average Convergence/Divergence” available in most trading platforms, including the Pocket Option trading platform.
Description of the MACD, its Formula and Advantages
When discussing the visual representation of MACD, it’s distinctly unique. The key feature is that within this oscillator’s window, you’ll find not just one but two elements coexisting: moving averages and a histogram column.
Important Note: Novice traders often confuse the latter with another popular indicator – volume. However, it’s crucial to understand that these two tools are derived from entirely distinct formulas. Thus, utilizing MACD as a gauge for exchange participants’ activity is not recommended, even though it does provide some partial insight into it.
Now, let’s return to “Moving Average Convergence/Divergence” or “MACD” for short.
Among the parameters that need to be configured before commencing trading, you will have control over the settings for fast- and slow-moving averages, as well as the histogram. By default, in the Pocket Option terminal, these values are preset to 12, 26, and 9, respectively.
It’s worth noting that the tool’s developer himself recommends using these same parameters. Therefore, it is advisable to stick with the suggested values.
Regarding the advantages of MACD, it offers versatility as its primary strength. This indicator can effectively signal both the direction of a trend and its potential reversal.
For instance, the positioning of the histogram above or below the zero level provides insight into the present trend, and the moment when the bars transition from one half to the other signifies a shift in that trend. Furthermore, a reversal or correction in the trend is signaled by the crossing of the signal moving averages. It is upon these signals that trading systems involving MACD are constructed.
How to trade using “MA Convergence/Divergence”
Considering that in binary options trading, there’s no obligation to follow the primary trend, it is often more prudent to focus on trend reversals. These reversals tend to provide more robust signals.
Hence, in light of the above, it is recommended to acquire a CALL option when the histogram shifts to the upper region, and the signal lines intersect from bottom to top.
Conversely, a PUT option should be acquired when the histogram drops into the negative section of the window, and the fast moving average crosses below the slow moving average.
The expiration should not be less than the formation time of two candles.
The MACD excels in effectively identifying divergence, although it’s worth noting that this task can be handled by nearly any oscillator in the market.
In conclusion, while “Moving Average Convergence/Divergence” provides reasonably accurate signals, it may not function optimally in extremely volatile market conditions. Consequently, it is advisable to exercise caution and refrain from using it when trading cryptocurrencies, where volatility can be exceptionally high.