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A Fresh Harmonic Look at Gold Using Binary Options

by Randall Liss & Kathy Garber

Gold Futures intraday chart, in this case an STRenko 20 Bar, shows price is testing a bullish Harmonic pattern completion point, aka a PRZ (Potential Reversal Zone). There are a couple of ways to trade this harmonic scenario.

First, if one would rather trade with the trend and the current bias being to the downside, a short opportunity is offered at a shallow bounce or a break down of 1192.6. The initial bounce to targets are 1199.8 and 1205.2, these will offer the initial tests to validate continuation of bearish movement. As long as these levels hold as resistance, the probability favors short positions with the ideal downside target at a double PRZ between 1154.2 and 1150.7 and scaling points, which are also considered potential bounce points so protect a profitable position there, at 1186.6, 1179.8 and 1166.6. The double PRZ behaves like a magnet for the downside target as well as a probable rejection point once price is there.

A harmonic pattern scenario offers a probable bounce point here at the 1192.6. The risk is ideally below 1186.6 but one could only risk 2 to 5 ticks because failure to bounce at this 1192.6 level describes this region as a means to an end, in other words, a target in route to lower PRZ levels.

So a hold above 1192.6 does offer a long opportunity for a counter trend trade to 1199.8, 1205.2 and 1210.3. The counter trend shifts to a new trend on this particular chart, once price can first hold above 1205.2 and then more important above 1210.3. Since harmonic patterns dream of retracing 100% or more, that would give us an ideal upside target of 1239 and scaling points at 1221.3, 1236.7 and 1232.6.

3-Dimensional Options Webinar
3-Dimensional Options Webinar

Given all of the above and interesting trade suggests itself using Nadex listed binary options.

The February gold future, which serves as the underlying value for binary gold options, is trading at this writing (December 16, 2014 at 12:30 EST) at 1196.4. This suggests that our 1192.6 level is holding well.

There is a weekly binary (expiring on December 19 at 1:30 PM EST) with a strike price of 1198.5. The market in this option is 42 bid, 45 offered. We purchase this option at 45, thereby risking $45 to make $55.

Against this position we now sell the binary option with a strike price of 1208.75 at 35.

Where does this leave us on expiration? Any settlement price between 1198.5 and 1208.5 makes the position $90 as the long binary option settles at 100 and the short option settles at zero.

A settlement price below 1198.5 costs the position $10 as both options expire worthless.

And a settlement price above 1208.5 costs the position the same $10 as both options settle at 100.

So, you see that this gives us a very nice 1:9 risk reward ratio and our sweet spot is anywhere within a 10 dollar range.

Trading Futures involves substantial risk & not suitable for all investors. Past performance not indicative of future results.

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