Using MACD & DMI in 1-2-3-4 Reversal Strategy

Using MACD & DMI in 1-2-3-4 Reversal Strategy

Submitted by adil on Fri, 03/14/2014 - 17:53

When trading binary options through technical means and strategies, it is neither uncommon nor unintelligent to combine various different technical tools to place the right trades. Very often such an approach to hunt the right trades reaps surer pathways for the trader to follow.           Traders often are reluctant to apply various approaches together for fear of increased complexity leading to wrong decisions or unwanted stress. However, using MACD and DMI together with 1-2-3-4 reversal strategy, is simple to understand one aspect, and secondly it leads the trader to enter high probability profitability positions.

MACD and DMI are famous tools which are used to identify strong trends in the price action of an asset. MACD uses divergence and convergence of EMAs to decipher changes in trends of price action. If the MACD falls and crosses over the signal, it is a bearish signal. Conversely, if MACD crosses over signal line and rises, it is bullish signal. If the price of an asset moves away from or diverges from MACD, it is an indicator of end of current trend.

Directional Movement Index (DMI) also helps a trader to identify what trend the price action will follow. DMI is a complex tool to calculate but easy to interpret, as it involves use of ADX (DMI moving average), -DMI and +DMI together. If –DMI line rises above +DMI, the signal is for a falling price trend. If +DMI line rises above the –DMI line, that is, if it becomes the dominant line, the signal is for a rising price trend. In either case, confirmation of trend is obtained if ADX rises above 50.

Referring to earlier article on 1-2-3-4 reversal strategy, recall that trader identifies a pattern and anticipates a reversal in price action for a new trend, with reference to 3 points in the price action. In the absence of any other indicators, it may seem quite risky to rely solely on the signals of 1-2-3-4 reversal strategy. Complementing the indications given off from 1-2-3-4 pattern with a trend setting signal from DMI and MACD, raises the probability of successful trade and also ascertain the movement in approximate number of pips.

For an uptrend reversal approach, follow the rules for setting up the trade up till the point of entry that is point 4. At that point, refer to MACD and DMI for additional signals. If these signals point towards an uptrend, enter in the call binary option trade. In such cases, the price most likely moves the distance beyond the number of pips it moves between points 2 and 3. Therefore, the trader can continue trading binary call option up till the price moves this additional distance.

Similarly, if the trader is looking to trade a downtrend reversal, the trader should follow the rules for setting up the trade up till the point of entry that is point 4. At that point, again refer to MACD and DMI for confirmation. If these signals point towards downtrend, enter in the put binary option trade. Here again the price moves the distance beyond the number of pips it moves between points 2 and 3, enabling trader to continue trading binary call option up till the price moves the additional distance.