MOVING AVERAGES

Moving averages are indispensable tools for binary options traders, who must continually hone their ability to predict price direction in markets. Technical analysts use moving averages to confirm the existence of a trend and show when a trend might be about to reverse. Multiple moving averages are commonly used on one price chart to generate buy and sell signals; binary options traders can use these signals to buy Puts and Calls.

A moving average is a meandering line that closely follows price action on a chart. It is considered a lagging indicator because the values plotted on the moving average line are calculated using past price data. The essential function of a single moving average is to smooth the price data and make the prevailing price trend stand out more clearly. Each new point on a moving average line is calculated by adding up a number of past closing prices and finding their simple or weighted average. Most trading software packages enable traders to choose how many periods to include in the calculation. Generally, including more past data in the moving average calculation makes the moving average line smoother and less sensitive to changes in current price. This has advantages and disadvantages that are discussed in the articles about specific moving average types.

There are a few types of moving averages. Simple moving averages take into account the closing price of each past period equally, whereas weighted moving averages, such as linearly and exponentially weight moving averages, give more mathematical significance to the most recent periods.

Moving average crossovers are widely used as buy and sell signals. These occur when a moving average calculated over a long period of time is on the same chart as a more sensitive, shorter term moving average. The shorter term moving average reacts more quickly to changes in current prices and will sometimes cross the longer term moving average. The direction of the crossover can be used to trigger a buy or sell action.