Using Harmonic Analysis With Binary Options
By: Kathy Garber
EURUSD Forex instrument is currently in between opposing emerging harmonic patterns, this is indicative of price being caught in a sideways range. Nadex spreads offer a low risk trade utilizing the range.
The color coordinated triangles, Fibonacci’s and text describe the different harmonic patterns in play. The largest pattern being the cyan colored emerging Bearish Butterfly (Be Bfly), the two smaller patterns are brown and blue emerging Gartley’s. Now the completion of these Gartley’s will either help price test the range extremes or will get the momentum going to break the range and complete the extended patterns.
The chart shows that line in sand levels at 1.3699 and 1.3575, aka the regions that will invalidate one of the opposing patterns, for instance if price goes below 1.3575, it invalidates the blue colored Gartley, if price goes above 1.3699, it invalidates the brown colored Gartley. So as long as price holds inside these line in sand levels, spreads are a low risk way to trade this instrument.
Once the line in the sand level is broken and held beyond it, the harmonic pattern then offers a directional bias type trade to the target. So if price closes and holds above 1.3699, the ideal target is 1.3776 to 1.3796 because this is where two separate harmonic patterns merge to form what is called a Double PRZ (PRZ = Potential Reversal Zone aka the target to complete a harmonic pattern). So a long bias trade opportunity occurs above 1.3699 and the ideal target is 1.3796, however, if you trade multiple units, 1.3733 is a place to scale or be willing to exit the trade if price fails to push above there.
Whereas a breakdown of 1.3575 offers a short directional bias trade opportunity with the ideal target at 1.3395 and scaling points at 1.3502 and 1.3460.
Given this view how can we apply it using Binary Options? Binary Options are an ideal tool for trading one’s market vision due to the easily quantifiable risk vs reward. Keep in mind, when we talk about binaries we do not mean any of the over the counter binary options you may see peddled out there. We mean exchange traded binary options due to their lack of counter party risk, ease of entry and exit and complete transparency. These criteria can best be met by trading binary options on the North American Derivatives Exchange, or Nadex . Nadex is a Designated Contract Market and Derivatives Clearing Organization, subject to regulatory oversight by the Commodity Futures Trading Commission (CFTC).
One of the many liquid products offered on Nadex is a UED/EUR binary. We will use weekly binaries that expire 3 days from the time (July 14 3:30PM EDT) of this writing at 3PM EDT on July 18.
Please take note that we are in no way advocating this or any other trade. The trade combination that will be illustrated below is time and price specific, so exact replication is impossible in any case. The purpose here is twofold: One, to show you a harmonic analysis of likely probabilities in the Dollar versus the Euro and two, to demonstrate how effective a tool binary options are in translating one’s market vision into a sound risk/reward ratio strategy.
We have drawn two lines in sand that should give a clear indication of the direction USD/EUR is headed. Those being 1.3699 and 1.3575. Therefore, a spread trade involving the purchase of one binary option combined with the sale of another option with the same expiration presents itself as a good opportunity.
The closest binary option to our upside target has a settlement price of 1.3675. The market in this option at this writing is 18 bid 20 offered. That means that the market as a whole believes that there is between an 18 and 20 percent chance that this level will be breached.
We purchase this option at 20 (remember, it is a binary option. It will settle at either zero or 100). Nadex has listed at this moment a weekly binary that corresponds exactly to our lower range target, namely 1.3575. The market in this binary option is 70 bid, 72 offered. We will sell this option at 70. What is our position now and what can happen at expiration in three days’ time?
A settlement price in three days’ time of 1.3675 or higher makes the position $50 per spread. The long binary settles at 100 making $80 per contract while the short binary also expires at 100 costing $30 per contract.
A settlement price of 1.3575 or lower makes the same $50 as both options settle at zero and the position nets the $50 credit.
A settlement price between 1.3575 and 1.3675 costs the position $50 as the short binary settles at 100 and the long binary at zero. Keep in mind, however, that that is a very narrow range (one tenth of a cent) as a settlement price to cost the position money.
Another important point to remember is that you are not committed in any way to hold the position until expiration. One can always and at any moment up until expiration trade out of either or both options.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.