In the ever-evolving landscape of financial exchanges, traders often seek indicators that offer simplicity and reliability. This quest for effective tools has led many to rely on time-tested instruments, such as MACD, which continues to play a vital role in modern trading platforms like Pocket Option. Many experienced traders tell legends about simplicity and reliability when it comes to trading strategy indicators. This is why many of the tools utilized on the relatively young binary options market trace their origins back to the last century and have a proven track record on traditional stock exchanges.
One such indicator is MACD, which dates back to the late 1970s. Despite its age, modern traders continue to leverage its insights, making it a staple on most trading platforms, including Pocket Option. This comes as no surprise, considering Pocket Option’s reputation for offering one of the most comprehensive and functional trading terminals in the industry.
What is MACD exactly?
Let’s begin by noting that the complete name of the indicator is “Moving Average Convergence Divergence”, created by the financier Gerald Appel, a renowned trader for his significant contributions to technical analysis. Appel introduced a groundbreaking tool MACD that revolutionized market analysis. With a background in mathematics and finance, Appel’s expertise and innovative thinking led to the development of MACD, initially designed for the stock market but later proven effective across various financial instruments, including electronic contracts. His pioneering work continues to shape the way traders analyze and interpret market trends, cementing his legacy as a trailblazer in the field of technical analysis.
Initially developed for the stock market, MACD has demonstrated its adaptability and effectiveness in electronic contracts trading. As an oscillator, MACD is presented in a distinct window beneath the price chart once selected from the list of tools. Its visual representation is distinctive, featuring a moving average alongside a histogram rather than the typical two or three lines seen with other indicators.
It’s important to highlight that the columns of the histogram in the MACD indicator are frequently mistaken for market volumes, but they serve an entirely different purpose. These columns represent the difference between two moving averages, providing insight into the convergence and divergence of these averages. Therefore, it’s crucial not to interpret them as indicators of market capitalization.
Before delving into how to effectively utilize the MACD oscillator, it’s essential to grasp its settings. The oscillator relies on three parameters: the fast, slow, and signal periods. The histogram, which illustrates convergence and divergence, is constructed based on the values of the first two periods. The suggested universal values for these parameters are 12, 26, and 9, respectively. However, seasoned traders may choose to adjust these values based on their preferred time frame and market conditions.
How to trade using MACD?
Let’s delve directly into the signals provided by this popular oscillator.
The first and most straightforward signal involves the signal line crossing the zero level. When the signal line crosses from below to above the zero level, it indicates a bullish momentum, signaling an opportunity to buy a CALL option. Conversely, when the signal line crosses from above to below the zero level, it signifies a bearish momentum, suggesting the purchase of a PUT option.
It’s important to emphasize from the outset that the signal described above is not highly dependable on its own. Therefore, it’s advisable to utilize it in combination with other indicators for greater accuracy.
The second signal involves the signal line exiting from the histogram, which is generally regarded as more reliable. If the signal line exits from the histogram in the negative (lower) zone, it suggests buying a CALL option. Conversely, if the exit occurs in the positive zone, it indicates buying a PUT option.
Finally, the most reliable signal is divergence. It occurs quite rarely, but every trader is glad to find it on his oscillator.
In conclusion, MACD is an adaptable tool for traders in financial markets. Its flexibility allows for various applications in analyzing market trends and making informed trading decisions. However, it’s crucial to acknowledge that, like any indicator, MACD may experience inaccuracies during periods of high volatility, such as news releases or significant speculation. Therefore, experienced traders recognize that successful navigation of financial exchanges requires not only proficiency in technical analysis but also adept money management skills. By implementing prudent risk management strategies, traders can mitigate potential losses and optimize their chances of achieving long-term success in the dynamic world of trading.
