How to Find Important Levels for the Day Trading Strategy

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Video Transcription

Welcome to the second lesson of the Day Trading Binary Options course. On this lessons you will learn how to prepare before applying the strategy to day trade binary options, how to look for market sentiment, and the important levels that you will trade from.

First of all, what is market sentiment? Market sentiment is the overall attitude of investors towards a particular security or larger financial market. My psychology plays a big role when trading the financial markets. This is because it is proven that if a large percentage of individuals think the price of an asset will go up, it eventually will.

We need to know if we are in a bullish market or bearish market to position ourselves correctly. You do not want to be buying [close] in a very bearish market or puts in a very bullish market.

Since we’re trading longer-term extra rations, we need to follow the trend. One of the easiest ways to understand market sentiment or to get market sentiment if you’re trading stocks is the price of the S&P 500. If the S&P 500 is going up it means that most people in the market are bullish at the time and if you’re trading stocks, you can actually start to look for long setups.

Another index that we use for market sentiment is the VIX. The VIX is called the fear index and it is the implied volatility of the S&P 500. What this industry represents is the market expectation of stock market volatility over the next 30 day period. Normally when the S&P 500 starts to drop, the VIX starts to soar. You can use these two indexes for an overall bias of the market. But for this strategy, we will go with a simpler method to determine the market sentiment.

Since we intraday trading, what we are going to do is we’re going to go to a four-hour chart of the instrument we are interested in trading. Let’s say that save that we want to trade the U.S. dollar. We go to the four-hour chart and we just look it. Price here is making higher highs and higher lows. Here’s a first low. Here’s a second low. Here’s a third low and here’s a fourth low. So, the market direction is up.

We are also going to use a moving average to determine the market sentiment. We are going to use the 50 moving average, and we are not going to use it as we used the 21 moving average on the 60 second option, but if this moving average is trading, or is pointed up a market sentiment is bullish, and if it’s pointing down market sentiment is bearish. Then we need to look for levels to trade from.

This is when we are going to start to use the Fibonacci retracement levels. Since we are trading the 50 minute expiration options with this strategy, we want the daily Fibonacci levels. In this case, we are in an option. So what we going to do is we’re going to measure the Fibonacci levels from high to low.

We can also measure the Fibonacci levels from this low to this high to get what we call a Fibonacci cluster. Just so you understand what we are doing here, the Fibonacci retracement levels from this low to this high are the overall levels that we are going to be watching, but the levels that we picked from this low to this high are the closest Fibonacci levels that we need to pay attention to. As you can see we are right there at the [61 eight] with the confluence on the 38 to the larger Fibonacci levels.

And of course, we are going to use support and resistance levels. We have here a level of resistance that we are now testing as support. So we are not trading yet, we are just analyzing the market. We need to find where these levels are because we need to find where are we trading from.

And as you can see it, looks better and it looks easier to trade from a work chart than it is to work from naked chart. Right now we can see that this level holds, which I think it will because we have had two spec lows which means that two four-hour candles rejection to this area of support, we could think of buying a call options for an end-of-day expiration if we were actually trading. But we’re not. We are just analyzing price action.

So what we did here is we calculated the Fibonacci levels from low to high. Remember? And then we picked this slope because this is a second structure, you need to understand this. This is the first structure. We make this low, this high. A new low, a new high. A new low, and then we test the same level as resistance and make a lower low. This means this structure to the upside was broken by these two candles to the downside and this low.

But then we continue to make higher highs and higher lows and higher highs and higher lows and higher highs. Which means that the overall structure continued but this is a new structure, so we need to calculate the Fibonacci levels of the new structure.

And as you can see we broke again with the second structure when these two candles broke with these lows right here when we start making lower highs. But that doesn’t mean that the trend has changed, it only means that we might be starting with a new up structure. That’s what we need our Fibonacci levels.

So this is basically what we’re going to do: we’re not going to plot a lot of Fibonacci levels, but the first thing we will we going to do, step-by- step, is what we’re going to do. We’re going to plug the 50 simple moving average. Then we going to check for higher highs and higher lows if we are in a bull market or lower lows and lower highs if we are in a bear market. Then we going to plot the overall Fibonacci retracement levels and then if we broke structure and we have a second structure to the upside or to the downside we going to plug new Fibonacci numbers to get the Fibonacci clusters such as this one right here. Then we going to draw levels of support and resistance that were at least [this] tested twice such as this one and of course we are also going to draw this level right here, which is the level that we broke to the downside.

So the important levels will be these highs right here that we’re testing our resistance that are now being tested as support and these lows right here that were tested as support and got broken. This is how we are going to work our chart before applying the strategy. Remember these are on the four-hour timeframe, and that on the next lesson you will learn how to actually day trade binary options.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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