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Trading Gold Using Harmonic Analysis and Binary Options

Randall Liss

Using an intraday perspective chart of STRenko 10 bar, the harmonic pattern setups offers a choice of both directional and spread trades Nadex listed binary options.


20140803 QQQD2 300x187 Trading Gold Using Harmonic Analysis and Binary Options

This chart shows that price is in between opposing emerging patterns, this is indicative of price holding inside a range.  So, if a tight spread or shorter term trade is desired, then the underlying extremes are 1298.4 and 1291.8.  A larger spread between 1310.4 and 1283 offers a longer term position or more conservative risk parameters.


There are multiple setups for directional trades but they require waiting for price to test or break through important levels.  For instance, the Significant Level – Line in Sand price of 1298.4 determines whether one or the other opposing harmonic patterns increases in probability of playing out and can invalidate the other.  So a push and hold above 1298.4 offers a long directional trade to 1310.4 or higher as shown with the green colored fibs.  These are scaling points or potential reversal points so when the underlying reaches these targets, one can decide whether to take profits or exit a profitable position.


To continue with another directional trade setup, since 1298.4 is the line in the sand for directional bias, a rejection there or a hold below 1291.8, offers a downside directional trade to targets 1283 or lower as shown with the blue colored fibs.


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 that trade daily on Nadex is the Gold binary with the December Emini future (listed on the CME) as an underlying value.

For our purposes we will use the weekly binary which settles at 1:30PM (EDT) on August 8, 2014. At this writing (August 4) this future is trading at 1288.62.

This means that we have significantly breached our sand in the line price of 1298.40. We see a new support level of 1291.80 and if that breaks we do not see significant support until 1283.

So, let’s translate this harmonic analysis using Nadex listed gold binary options.

The market in the gold binary option with a settlement price of 1292.50 has a market of 42 bid and 45 offered. This means that the market as a whole believes that there is between a 42 and 45 percent chance that the Dec Emini future will be at or above that level on expiration.

We sell that option at 42, which means that we are risking $58 to make $42 (binary options settle at either zero or 100). At the same time, there is a Nadex listed binary option with a settlement price of 1982.50, a fraction above our major support level of 1283. The market in that binary option is 57 bid, 60 offered. We purchase this binary at 60.

What is our position? Let’s break it down:

If the CME listed Dec Gold Emini future is between 1282.50 and 192.50 at 1:30PM (EDT) on August 8th the position makes $82. The 1292.50 that was sold at 42 settles at zero and the 1282.50 that was purchased at 60 settles at 100.

A settlement price below 1282.50 costs the position $18 as both options settle at zero.

A settlement price above 1292.50 costs the position the same $18 as both options settle at 100.

So, we this binary option play on gold risks $18 to make $82 giving a slightly better that a 1:4 risk reward ratio.

By Randall Liss and Kathy Garber