FX Derivatives for Spot Analysis

Hey everyone!

I would like to share with you an interesting way to interpret a price movement. So if you are tired of using some questionable support and resistance lines, moving averages, etc. - this method will be right for you, because it shows you the anatomy of a market.

As you may know the market makers are using various derivatives to hedge their positions. Like currency futures or options, swaps, forwards. Guess what! We can use that!

So here I will show you how I use information about FX Options to trade spot.

On the daily chart you can see EUR/USD. The green zones are representing a potential resistant and the gray ones a potential support. In between there is a balance line, which is just arithmetical average. I draw those zones once a month and they stay for entire month unchanged. The data for them is results of options trading, which everyone can download from Chicago Exchange website.

So I go to Chicago Exchange website, download some data and draw it on the chart! And here we have a price corridor.

The reason why the price shouldn’t go above or below those zones is that in this case the market makers will start losing big money and they defiantly don’t like that. However sometimes it happens, so there are some tricks I use to predict that.

This method of market interpretation is based on facts, on real data, on reals results and not on some mysterious historical or hypothetical performance. I think, its way better than some moving averages.

However this method cannot be used alone but you can easy implement it to any strategy you want. It is perfect for swing trading on daily or H4 chart. Having those zones on a chart make you see a skeleton of the price.

Soon I will post some detailed analysis of EUR/USD for June and maybe also for other currency pairs, if you like.

So subscribe to this topic, we will further discuss this method as well as other methods based on fx-derivatives.

Hi,
Interesting approach of the market. Please, put the specific CME link.
Thanks,

The green and grey areas look like some OTM strike prices. Do you look for some special activities around those calls/puts? Cheers

So, I would like to continue.
(By the way, I don’t know how to put images directly between texts not as an attachment, if you know how please comment)

The first week of the trading month is over, let’s see the results:
The month began with the down movement but then the price returned into the upper half of the “Options corridor”. On the first attached image ('eur1' daily EUR/USD chart) we can see a resistant on the Balance Line (1.12250).

I would like to repeat, that this Line as well as both green and gray zones are results of EUR Options trading on Chicago Exchange. Everything is based on real data and not on some questionable and subjective parameters.

Anyway, this situation indicates an uptrend. But let’s not hurry. There is another FX-DERIVATIVE, which can help us. EURO FUTURES!!! Look at the second attached image. This is H4 EUR/USD chart.
I put some blue zones on the graph. Those zones indicate price levels where most of bad traders will have Margin Calls! That’s right! So the market makers can use that for their evil purposes. The data for those zones I also took from the CME website.
Ok, so right now the price is between the Balance Line and the blue (let’s call it “Margin Zone”). Even thou we have the uptrend (because of the options), I would wait until the price will move above the Margin Zone (1.13122 - 1.13386). However on the level (1.14391 – 1.14127) there is another Margin Zone which actually is located on the maximum of the last month. Will there be a resistance?
To begin trading SHORT, the price will have to move below the Balance Line and below the lowest Margin Zone (1.11214 – 1.10950).

takechance posted:
The green and grey areas look like some OTM strike prices. Do you look for some special activities around those calls/puts? Cheers

It is little more complicated. The goal is to locate critical zones for the hedged positions of the market makers. As soon as the price will leave this options corridor, and as long the price will stay outside of it, the market makers will lose money. However sometimes they do. :)

urbinatrader posted:
Hi,
Interesting approach of the market. Please, put the specific CME link.
Thanks,

There are a lot of links and a lot of calculations involved. I will be posting things slowly. However I take everything from Exchanges where you can trade FX DERIVATIVES. CME website or sometimes ICE

Can you please explain this calculation what they are and how you come out with this numbers? Thanks

Analyzing price chart with different oscillators, moving averages, and other indicators make to me no sense. How can you predict future looking to the past? Well it will be very subjectively. It is just not enough! You can draw some support or resistant lines, but why should they work? Be course a lot of traders also drew them? You put 30 periods MA, or EMA? Why 30? Why not 32? Or 33? For how long will this work? When should you adjust? After you lose all your money? All this indicators are still part of a gamble game or let’s say blind gamble game. Of course you can win and if you do - good luck! But for me that was not enough. There should be something more, logical explanation of price movements.

So I have found something interesting: The price movement has an anatomy, a structure, a skeleton. It is connected with derivatives market! I am studying this method over two years and it’s very promising. The best part is that I get all the data from the open sources and the data is changing, so I constantly adjust the strategy to current market conditions. Isn’t it great! So right now I have an explanation, why price turned around or why not, why there will be resistant and why there won’t be any. It is not a secret that Market Makers use derivatives (options, futures) to hedge their positions. FX Derivatives are traded on Chicago exchange and everyone can see the rules and results. I managed to find influence zones from FX-OPTIONS and FX-FUTURES. Even thou I work on this method over two years, there are still a lot of things ahead. For example, recently I found out an interesting connection of price with SWAPS! That is new topic of my research right now.

If you are interested in that method and want to find out more, subscribe to this topic and add me to your contact list so we can also chat.

Very interesting and complicated approach to trading. I will look into it some more and make my own tests. If the professionals are using it, then it should work.

Let’s look at AUD/USD:

The price right now is above the Balance Line and that indicates an uptrend. (“aud1” attached image AUD/USD Daily chart), but to be sure we need to look deeper. On “aud2” AUD/USD H4 chart you can see the blue “Margin Zone” (0.78177 – 0.77977). Most traders who are still holding short positions since the down movement from the 03rd of June till the 6th of June will have their Margin Calls on that level. What does that mean? If they were selling, margin call means “buy at market price”! So as soon as the price will reach that zone we should see an increase in supply and the price will go up. UNLESS the Market Makers want to increase their amount of short positions, in this case they will short on this 'margin calls' and the price will return to the balance line.

That means that in order to trade long, we should wait until the price will move and stay above the Margin Zone.

If you are interested in that method and want to find out more, subscribe to this topic and add me to your contact list so we can also chat.

small remark: of course not all of traders will have Margin Call, but the worst ones (with lowest amount of money and worst entry price)

small remark to previous post: not all traders will have Margin Calls, but the worst ones! (with the smallest accounts and worst entry prices). This Margin Zone (0.78177 – 0.77977) represents price levels with increased amount of supply.

As long as you have a sound account management system, you should not be one of those traders who gets a margin call.

Can you implement your approach (i.e write an EA) in automatic way on a small time frame ?