SIMPLE MOVING AVERAGES

Simple moving averages are very popular among traders of all assets, including binary options. As with all moving averages, simple moving averages are superimposed over the price data on a chart and used to identify or confirm the existence of a trend. Trading software usually gives traders the ability to customize the moving averages they use, but there are some popular conventions for the parameters that are used.

To build a simple moving average, a trader first chooses the number of price periods he wants to be included in the average. 50-period moving averages are very popular. Each new point on a 50-period simple moving average line is calculated by adding the closing prices of the previous 50 bars or candles on the chart and dividing the result by 50. A new point is added to the line as each new period comes to an end. The result is a smoothly curving line that follows price data closely and makes the trend in the data stand out very clearly.

Adjusting the number of periods used to calculate a moving average can change its behavior significantly. Including more periods makes the moving average line smoother and less reactive to large price changes during any single period. These moving averages generate fewer trading signals for traders to use, which can be good and bad—there will be less opportunities to profit, but also fewer false signals generated. Moving averages calculated using fewer periods are much more sensitive to large price changes that occur in a single period. They are thus less smooth than longer term moving averages and tend to generate more trading signals—true and false ones. Many traders take advantage of these differences in moving averages by plotting two on one chart and using the instances when they cross each other as trading signals.