On Trend Forex Trading Strategy for Binary Options: Suck or Doesn’t?
Full Review of the “On Trend” Forex Strategy for Binary Options Trading
I know what you are thinking: “Oh, another Forex strategy? But we are trading Binary Options.” No problem because as long as we have a strategy that indicates direction and it is right more often than it is wrong, adapting it for Binary trading is easy. Instead of going long, we select a Call and instead of selling the currency pair or any other underlying asset, we will select a Put. All we have to figure out next is the expiry time, but I guess we will manage to do that. Ok, let’s see what this strategy is all about and if it can help us or not.
How to use “On Trend” strategy
The indicators used for this strategy are: 4 period EMA, 10 period EMA (EMA = Exponential Moving Average), ADX 28 (Average Directional Movement Index) and MACD with settings 5, 10, 4. You can use any platform that has these indicators because none of them are custom MT4 indicators. Ok, after all the indicators are plotted on your charts this is how it should look like:
Now let’s see what the rules are for a Call and a Put:
- Green (+DI) ADX line must be above the Red (-DI) ADX line
- EMA 4 must cross above EMA 10
- MACD must be above the zero level
- Red (-DI) ADX line must be above the Green (+DI) ADX line
- EMA 4 must cross below EMA 10
- MACD must be below the zero level
Here is a perfect Put signal exemplified:
As you can see all three conditions are fulfilled almost at the same time and price immediately starts to move south. There is no clear indication in the original strategy about which signal is the final confirmation or if all conditions must be met at the same time, but from what I saw, if all signals come within a short period of time, the trade has a higher win probability.
Why Does “On Trend” Strategy Suck?
Moving Averages are lagging by nature and this makes them somewhat less reliable. The same applies for MACD which is based on averages as well. If you notice, the MACD settings are very close to the ones used for the two Exponential Moving Averages and this translates into similar signals coming from the two indicators. In other words, when the 2 EMAs cross, MACD will almost always cross on the other side of the zero level. I don’t know why I would need two EMAs and a MACD on the chart since they give the same signal.
Why “On Trend” Strategy Doesn’t Suck?
Immediately after I placed all the indicators on my chart, and started back testing, I could see a lot of good signals and I think the main strength of the strategy is the Average Directional Movement Index. Its default value is 14 but the strategy uses 28, a setting which makes it smoother and less influenced by the noise in the market. Once the Red line is above the Green one, the bears are in control and I know Puts are probably going to be profitable (the opposite applies for Calls) and if the lines are not clearly spread apart, it keeps me out of ranging periods.
Adapting it for Binary Options
I think the first thing we must do is get rid of the MACD or the EMAs because they give almost the same signal. Which one to delete is up to you, but I would keep the MACD because I find more uses for it than I do for the 2 EMAs. Ok, next we must figure out the expiry period. This is where it can get a bit tricky but one thing is needed: to use a longer expiry time than the chart time frame used to identify the entry. So, if we are looking at a 5 minute chart, the option must expire at least in 15 minutes because maybe the next candle after the signal will go against my trade. But if we have three candles (one 15 minute candle contains three 5 minute candles), the trade has more time to come in my direction. It’s an ongoing work and if some of you find this strategy appealing, share your thoughts on the Forum and together maybe we will find the best way of adapting it to binaries.
Wrapping it up
Overall, the strategy is pretty safe and uses three good tools but I think it will be hard for a novice to make the difference between a good signal and a poor one because ADX is not the easiest indicator to use. From what I saw so far, the profitable signals are more frequent than the losing ones, but I can’t say that I tested it for an extended period of time to clearly say if it’s consistent enough. Nonetheless, I must say thanks to the guys that put it together. If you want to read the original strategy, you can find it here: http://www.forexstrategiesresources.com/trend-following-forex-strategies/49-on-trend/
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