“Narrowing our target” shows a weekly euro chart on the Monday, March 5 open. We placed — inside the traditional support and resistance levels — sentiment support and resistance derived from the weekly Nadex EUR/USD binary option bid and ask prices. The resistance sentiment level shown is 20%, indicating an 80% expectation (but probably higher based on our study referenced above) that the price will not reach that level by the end of the week. The sentiment support level shown is roughly 80%, meaning a 20% expectation (probably lower) that price will reach that target at the end of the week. This balance is called “sentiment polarity.” A strike price of $20 on the ask would be balanced by a strike price of $80 on the bid. A trader can choose a range that matches his risk preferences.
On the morning of March 5, sentiment support and resistance using the 80/20 sentiment polarity ratio showed that the spot price was much closer to the sentiment resistance level than to the sentiment support level. This showed a bearish sentiment bias. It also was an indication that a short position was a lower risk option, as you could place a tighter stop based on support and resistance levels. The EUR/USD sell off that subsequently occurred confirmed that the bearish crowd was right.
Using weekly binary options to find sentiment polarity can be an effective tool to improve your trading. Every market is made up of traders, so any clue you can gain regarding the sentiment of other traders can only help your analysis.
Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of “Fear and Greed Trader” at Agora Financial and can be reached at firstname.lastname@example.org.