One Trader's Method For Using Deviation Levels On A Daily Time Frame

It is inspiring to hear how another trader takes the tools available in their arsenal and uses them beneficially. One such trader recently shared their experience using the Apex Deviation levels which are available free at www.apexinvesting.com.

This trader likes to compare potential In The Money (ITM) strikes to the expected move of the day and then calculate the probabilities of those strikes containing the day’s market movement based on the standard deviation score of three. This basically calculates the confidence interval for available daily strikes for that day. This can be done looking for ITM strikes going short or long. The bias, of course, is dictated by the market move for that day. Nothing earth shattering here, it just may help your brain execute a trade on a daily time frame when you look at the probabilities.

Here is an example from a chart on the TF. In this example, the probabilities of three different strikes were calculated. The 1258, 1260 and the 1262 strikes all with 4:15 PM expirations, looking for shorting opportunities that would expire ITM by the end of the day.

Simple Calculations
In order to aid in these calculations, this trader created a simple calculator in excel. First, the settlement price level is entered followed by the 1 deviation price level. After those two numbers are entered, you then enter the established low or high, depending on market bias. Finally, the strike that is to be checked will be the “high” or “low” depending on the bias.

The image below shows the calculated probability of the 1258 strike containing the market movement by 4:15 PM.

Here is an example of the 1262:

The “Sweet Spot”
How do you apply this to your own trading? This trader’s “sweet spot” is strikes that represent about a 1.5 deviation or 86.64 percent or better. When trading, look for at least $20 profit potential or more. Sometimes the trader will leg in to a strike that has met the “sweet spot” or better in terms of probabilities. If the legged into trade gets filled, great. If it does not get filled, no worries. The trader will enter and set a take profit working order. You can also choose strikes or wait for strikes that are beyond a static deviation. Static refers to the actual deviation line itself plotted on the charts, not the actual high to low deviation move.

This is an example of the Traders Helping Traders philosophy found at www.apexinvesting.com, a service of Darrell Martin.