Read the first part of how signals work for binary option from classic moving averages. In the second we improve the results and give recommendations for trading.
Improving the Moving Average
The use of computer technologies in the exchange activity made it possible to calculate complex algorithms aimed primarily at reducing the value of the delay. Additional smoothing is also used to further level the market "noise": double (DEMA) and triple (TEMA) exponential moving average.
Such techniques make exact binary options strategy even more sensitive. More are used by medium- and long-term traders, so we will not consider them in detail. Let's look at three options for improving the response to the current market:
Hull Moving Average (HMA)
The author is an Australian trader Alan Hull, who proposed to reduce the delay using instead of the actual value of the period price its square root. As the base average will be WMA, its system of weights adds accuracy. The figure shows an example of how both indicators work with the same periods. The picture is an example of how both indicators work with the same periods.
You can see that on the HMA chart, the trend change is defined more clearly than the standard MA. But there are problems:
Variable Index Dynamic Average (VIDYA)
All the classical algorithms use a fixed MA value smoothing for the sake of simplicity of manual calculations. For the stock market, this was correct because of the lower volatility compared to Forex and the appearance of occasional sharp impulses. This averaging does not take into account the peculiarities of currency pairs and further increases the delay and the number of false free binary signals. Dynamic averaging as in the VIDYA indicator can solve the problem.
To assess the current volatility, VIDYA includes a special Chande Momentum Oscillator (CMO) - the ratio of the total count of positive and negative price increments for a specified number of periods. The resulting absolute coefficient in the next step is applied to the EMA for the final smoothing.
For most of the trading day, the indicator moves synchronously with the corresponding EMA. But closer to the price and you can create a binary option bot with less delay. Also, the CMO calculation algorithm gives a faster transition to horizontal motion (flat) at the end of the trend. There is a time to close the position, to change trend strategy to a channel, to stay out of the market.
Kaufman's Adaptive Moving Average (KAMA)
The next modification is the moving average EMA, where the basic calculation parameter will be the "efficiency coefficient" to adjust the degree of averaging and adaptation to the current market. On a sideways move, the chart is less sensitive (like EMA with large periods). And when a new trend appears, the coefficient begins to react more actively as a "fast" EMA and give a binary options signal.
Adaptive Kaufman was developed to solve a big contradiction: on the one hand, a reaction to short-term price impulses, especially after the release of strong fundamental news, which can be falsely interpreted as a new trend. On the other hand, with too much smoothing, you can miss a good entry point.
When using other people's strategies and especially automated advisors, find out which Moving Average will apply. Trend indicators will only be a start for further analysis, the final result depends on how accurately they work.
Recommendations about use …
Like all technical analysis tools, Moving Average does not evaluate visual analysis data and the overall market situation. It only works at the prices of previous periods and can not give 100% correct forecast!
Let's summarize. Understanding why signals for binary options work, we always remember the moving average. They will be relevant for a long time, despite the growing dominance of high-frequency HFT trading. MA gives a stable profit with any deposit and level of training, it is only important to follow the rules and not to forget about money management.