The moving average can tell you where the market is heading with regards to the price of the asset you are monitoring. The moving average basically shows you, in the shape of a line on your price chart, what the average price of the asset has been over the time frame chosen.
You can define the time frame yourself, thereby adjusting the information the moving average gives you. The longer the time frame, the less responsive the moving average becomes to price fluctuations. On the other hand a longer time frame will help eliminate minor, short-lived fluctuations.
This average is a great way of seeing the general trend in which the price of an asset is moving. It can also throw up some very solid trading signals. One such signal occurs when a moving average crossover occurs. In this article we tell you about moving average crossovers, and how you can use them to make money on binary options.
What are moving average crossovers?
In general, the average price of an asset will follow the market. As the price of the asset rises, so will the average. However, if the price rises quickly it will take time for the average to catch up. How quickly this happens will depend on how long time frame you are operating with. Obviously, if you are looking at an average price over 30 minutes, it will show the impact of a price change much faster than an average price that takes the last 4 hours into consideration.
Now, when the current price of the asset moves outside of the average because of a sudden shift in price (in this example we are talking about rising prices, but all the same principles apply to a bearish development) you will see that the line representing the moving average is crossed by the line representing the current price. This is the moving average crossover.
The importance of such a development is such that it is considered a trading signal. Basically, when this occurs, you know that money can be made if you act accordingly.
How do I make money on a moving average crossover?
When the market crosses the moving average it indicates that a trend is strong and has some momentum going in the direction indicated. The consequence of this for binary traders is as follows:
- When the market crosses the moving average in an upwards movement it indicates prolonged upwards movement: make money by investing in a high option.
- When the market crosses the moving average in a downwards movement it indicates prolonged downwards movement: make money by investing in a low option.
These are examples of so-called binary options signals. They can help you enormously in guiding your trading, but they are not, however, flawless. This example is no exception. There are many instances where the crossing of the moving average is not followed by the expected development.
There are many reasons for this. It can be a case of sideways market conditions that can cause the market to cross the average. Also, retracements and fluctuations can always occur even within strong trends, making exact predictions very difficult to make. This means that as good as any signal is, they are never flawless.
In the case of the moving average crossover, there are things you can do in order to make sure the crossover really does indicate a continued market movement in the indicated directions. They include:
- Take your time and don’t jump the gun. By waiting to see what happens in the next period you can invest with more certainty if the movement continues, or save yourself a losing trade in case it doesn’t.
- Make sure that the crossover is accompanied by an increase in trading volume. This is a strong indicator that the movement is solid, and will continue in the indicated direction.
If you would like to learn more about the Moving Average and how it can help you make money, there are several more articles on our site that you might find of interest!.