Here you will learn about the main indicators that you can use in order to trade binary options: Moving Average Convergence, Aroon, Aroon Oscillator, Relative Strength Index, On Balance Volume.
The Aroon indicator is a relatively new one and has only been around since 1995. It’s a very versatile indicator used to determine both the strength and the direction of a trend, as well as the potential emergence of a new trend.
The indicator has two basic components in the form of lines with different color and consistency. The “Aroon up” is a blue line (note that some websites or chartists may decide to use different colors) that shows how much time has passed since the last highest price point within a given time frame. The “Aroon down” is a dotted red (again, remember that some chartists might use different colors)line that shows the exact opposite of the Arron up (as the name suggests) – displays the time that has passed since the last lowest price point within the given time frame.
The Aroon oscillator is a lagging indicator based on the Aroon lines. It is determined by simply subtracting the Aroon down from the Aroon up and is measured on a scale from -100 to 100. Conversely, the higher the value is, the more upward movement we have and the lower it is, the more downward movement we have. Naturally, we can also use it to determine trend reversals by following the oscillator – if it crosses from one line to the other, then we have a trend reversal. If it goes from positive to negative, then we know that we have a downtrend on our hands. If it goes from negative to positive, the uptrend is obvious.
Another way this oscillator is useful is by looking at the convergence. In other words, if we notice that the oscillator and price are moving in alternate directions, this signals a trend reversal. Even though these concepts are really easy to understand, they are also tremendously useful and you should be very well familiar with them because one day if you decide to trade you are going to need them.
Moving Average Convergence
This is one of the most popular indicators technical analysts today use. Its built up by two components in the face of two exponential moving averages. The basis of this indicator is the relationship between the two moving averages in a reference to a centerline. This centerline is where the two moving averages are equivalent to one another. The objective of this particular indicator is to measure the current momentum. This is done by subtracting the longer term moving average from the shorter term one. In other words, it looks like this:
MACD = shorter term moving average – longer term moving average
Thus if the MACD is in the positive, this means that the shorter term moving average is higher than the longer term moving average, which tells us that we have an upward momentum. If it’s negative, then we have a down ward momentum. The most widely used exponential moving averages are the 26-day and the 12-day ones. Of course, adjustments can always be made in order to serve the needs of the analysts, but those two are the most used.
Relative Strength Index
This is yet another popular and widely used momentum indicators in technical analysis. Th is indicator’s main function is to identify overbuying or overselling of a security. The indicator is structured in a range between zero and 100. If the result of a reading is above 70, then the security is being overbought, and if the reading is below 30, this indicates that the security is being oversold. Should conditions of overselling or overbuying arise, this may suggest that the current price of an asset is not a stable one because it has been radically changed due to the conditions. Once those conditions are gone, however, this may result in a sudden drop/spike of the price, depending on what the original price was before the change. It’s always a good idea to know this beforehand. The trading period most commonly used is 14 days.
The on-balance volume indicator is one of the most recognized in technical analysis. It’s a very simple indicator and it’s main purpose is to detect movements in volume. The calculations that take place are very simple. The total volume for the trading period is assigned a positive or negative value based on the price movements of the trading period. If the price is up, then the volume gets a positive value and if the price is down, it gets a negative value. These values are then added to a whole that has been collected since the beginning of the measurement process.