The price action is full of noise and insignificant fluctuations in the price in the financial markets. Sometimes it feels like a strong trend should begin right with this particular candlestick which edges up or slides down. But the action does not begin, price come back to the initial level, deals are getting burned with losses. Some trading systems add more and more complicated technical indicators in the analysis, additional filters and tools in order to reduce the overall number of fake trading signals. But that approach does not lead to profits as the general algorithm becomes too complicated, while the list of entering rules increases the number of multi-level conditions. Most of the profitable strategies are simple though, and the main question has to be divided by several stages to make the final trading decision.
All traders need is to determine the direction of a possible trend, find the best moment to enter the market, and avoid false price fluctuations. The most popular technical tool and the most simple one is the moving average. It helps to assess how far the current price has gone from average historical rates and what is the current direction of the trend. If, for example, prices stay below moving averages for quite a while, then the likelihood of the downtrend is large. On the other hand, if prices are hovering around moving averages, then the sideways range is the most likely outcome. In addition, different period of moving averages can make the analysis more flexible. Comparing short- and long-term average prices always help to understand the real market’s intention.
The Channel Breakout and Moving Average Binary Options Trading System is mainly based on two different moving averages. The first one is the simple moving average with the period of 20 bars and it has to be applied to high prices but not close rates. That allows avoiding too many spikes of the price, unnecessary whipsaws and insignificant fluctuations. The scend moving average is the exponential one, and it has a modified period of 34 bars. That’s one of the figures in the Fibonacci row, taking into the account a longer period, while the exponential formula gives an additional smoothing for the overall calculation. The main condition to start buying call options is that the SMA20 high curve has to be placed above the EMA34. For put options cycle, things have to be the opposite, the SMA20 has to be below the EMA34 curve. It’s also worth looking at the price before pulling the trigger. The best candlestick to start buying call options would cross both MA’s on the upside, while the put-options period comes when the price crosses both curves from upside down.
Once we’ve found such a moment, it’s time to switch attention to the third technical indicator of the trading system, which is the ADX indicator. That’s not a traditional oscillator measuring oversold and overbought levels. It’s the index of trend’s strength. Although ADX usually comes with two additional lines, -DI and +DI, we ignore that curves in this trading system, as we already have the information needed from two moving averages. The only line we watch is the main ADX line (the black line on the chart below). Settings have to be modified as well. The best period is 13 bars, as we do not want the indicator to look at too long period. The default threshold in the ADX indicator is 20, but we enlarge it to 25 just not to be confused with too weak trend momentum. So, we start buying call or put options (depending on the conditions of SMA and EMA described above) when the ADX main line crosses the threshold level of 25 from downside up.
The final question for any trading algorithm is to find the best moment to stop the trading cycle. Here are several different approaches on how to exit the trade. The first one suggests a pre-determined level of pips for an asset to go, depending on its volatility and the timeframe we trade on. Different assets have different volatility levels, and it would be hard to expect EUR/USD to soar 150 pips in 15 minutes, as those periods are very rare. At the same time, exiting the trade too early (when the price has moved for 5 pips only, for instance) would not be the best trading decision of the signal was strong enough to continue the current trend. Another option is to wait for the opposite signal. For example, if you were buying put options and EMA34 and SMA20 crossed each other for the second time after you pulled the trigger, then it’s worth thinking about to stop trading, as the likely hood of a reversal is getting higher in that case even though the ADX indicator keeps showing a strong trend momentum.
An example of the Channel Breakout and Moving Average Binary Options Trading System in action is shown on the chart below.
