MACD & Bollinger Bands Binary Trading Strategy
This strategy is an expansion of the MACD trading strategy. While the MACD is used for indentifying the prevailing trend, this strategy adds the Bollinger bands as an additional indicator for a trade trigger in order to minimize the likelihood of a false signal. Although the MACD indicator is reasonably reliable, it is not without its shortcomings. One of its shortcomings is the fact that a wild price swing can result in prices varying significantly for the market trend. Another shortcoming of the MACD is because the indicator is a lagging indicator. And because of this lag, the MACD is susceptible to false signals as signals are generated only after prices have bottomed out or peaked.
The Bollinger Bands
A creation of by a technical analyst by the John Bollinger, Bollinger Bands comprises of an exponential moving average acting as a center line flanked by two price channels, an upper band and a lower band. These bands will contract or expand as prices decrease or increase in volatility respectively.
Analysts use the Bollinger Bands as a mean to help trace how the market is trading by filtering out the price action. Regardless of how prices are fluctuating, analysts are still able to monitor if the trading activities are still confined around the primary trend. Hence by using the Bollinger Bands, traders can hope to cancel out the effects of false signals as a result of wild price swings.
Advantages of the MACD & Bollinger Bands Strategy
There are several advantages of using this double indicators strategy to trade binaries. First of all, the MACD is a fairly dependable indicator for generating trading signals. It is reasonably accurate and simple to use. It allows traders to have an insight into what is happening in the market.
Secondly, the Bollinger Bands is powerful tool especially for binary trading as it is an enveloping indicator. Regardless of which direction the market is heading towards to, traders can depend on it to trade the market. In addition, it cuts down the risk of false signals.
Lastly, this double indicators strategy is able to provide traders with precise market entry points making it easy to trade dynamic and volatile financial markets. Even though traders generally have difficulties is determining when to exit the market, this strategy is still able to provide them with some indication of where the exit points should be.
Disadvantages of the MACD & Bollinger Bands Strategy
Like all trading strategies, there are always some limitations to them. Likewise, the MACD & Bollinger Bands strategy is no exception. While this strategy is great for trading short term binaries like 60 seconds options, it becomes riskier as we stretch the timeframe of the trade longer.
The Bottom Line
Although, the above mentioned strategy helps to reduce the incidences of false signals, it doesn’t entirely eliminate them from cropping up. Further analysis are required if traders wishes the chances of acting on a false signals.
On the whole, the MACD & Bollinger Bands strategy is quite effective especially when we are dealing with short term binaries. But still, it is not without its own risks. But this is why we use double indicators as the readings from both indicators are used to confirm each other.