When I begin auto-trading with the BINARY OPTION ROBOT(tm), the initial settings that I intend on selecting are MACD and RSI in combination. If you are a seasoned trader, then you are very familiar with these popular chart indicators. For others, if you are learning about binary options trading for the first time, you might not know a MACD from a Big Mac from a Mac Daddy. In this article, I will break down these terms so that you can understand how the Robot will react to these events.
What is MACD? MACD stands for “Moving Average Convergence Divergence.” In simple terms, the MACD consists of two chart lines representing two different moving averages, one short term and one longer. When these two line cross each other, they create a signal or indicator.
Specifically, the BINARY OPTION ROBOT(tm) follows the MACD based on the 20 day exponential moving average (EMA) and the 50 day EMA. When the 50 day line crosses over the 20 day, it typically indicates a price move down. When this indicator is signaled, the Robot will purchase a PUT. If the price of the underlying ends lower at expiration, then it’s a successful trade.
When the 20 day line crosses over and rises above the 50 day line, the opposite is true. This indicates a bullish tendency, so the Robot will initiate a CALL trade. If the price is higher at expiration, the trade wins.
There are other ways of determining value in trading according to the MACD if you are trading manually. However, we are not concerned with these factors, since the Robot only acts upon those two occurences of crossovers.
The MACD is a good indicator that is trusted by many traders. In fact, the popularity of the MACD is what makes it a fairly reliable indicator. The more popular an indicator is, the more traders will react when MACD events occur. These signals prove themselves to be true often times as self-fulfilling prophecy.
In many ways, trading is a popularity contest. You don’t have to know which equities or commodities are the best. You simply have to figure out which ones will be more popular, or what will be the popular reaction by the largest number of traders. That is another way of saying “trend.” The MACD is a good way to monitor the movements of these trends.
If it is so reliable, why not trade on the MACD alone? While the MACD demonstrates the directional move of current trends, it does not demonstrate the “popularity” of this movement. For that, we need to pair it up with information about the relative strength of the movement. That is where RSI comes into play.
What is RSI? RSI stands for “Relative Strength Index.” The RSI is a measure of the magnitude of recent gains and losses in order to assess whether the current price is in overbought or oversold territory. The RSI is a number ranging from 0 to 100 that indicates the relative strength of the current price. As the RSI approaches 70, it indicates that the price is getting into overbought territory, which can signal a reversal. Likewise, as it approaches 30, the RSI signals oversold territory. This can be helpful in identifying key price reversals.
As for the Robot, when the RSI indicator signals that the currency pair at its current price level is in overbought territory, it will trigger a PUT purchase. If the price then closes below the price when the PUT trade is indicates, the trade is a win. If the RSI indicates that the currency pair is oversold, the Robot will initiate a CALL trade. The trade will be successful if the price closes higher at expiration.
The RSI is a good signal basis for picking the right time to purchase binary options. However, the RSI carries risk. A large surge or drop in the price an equity of commodity can effect the RSI and produce a false signal. Therefore, it is not advisable to depend solely on the RSI as a purchasing signal. Instead of relying on the RSI alone, it is best when used in tangent with another indicator.
By pairing MACD with RSI, the reliability of both indicators are improved. The RSI will ensure that the MACD signal is of a sufficient enough strength to act upon it. The MACD serves as a check and balance against a false signal in the RSI. Pairing the two together may reduce the number of trades, as it represents a more conservative approach. But it should drastically improve the likelihood of making a successful trade. In binary options trading, the key is not trading in higher volume or higher frequency, but increasing accuracy. I feel like using MACD and RSI together should give that advantage.
The refined hypothesis that we will be testing on the first round of experiments with the BINARY OPTION ROBOT(tm) is to see if auto-trading with the settings selected that will use the RSI and MACD in tangent to creating trading signals will produce repeated wins of such frequency that we show a consistent gain. As stated in the previous post, we will also be limiting to a single currency pair, the EUR/USD as it is the most popularity. If you have tried these settings in your own trading, and would like to share the results that you have experienced, we encourage you to comment and add to the conversation.