Three Ways to Score Big Using Sentiment Analysis
Earlier this week I showed you how I use sentiment analysis to track the emotion of the market each week.
Today I want to share with you the three strategies I use when choosing my currency plays every Monday morning for my premium readers.
All three of these strategies revolve around the fact that the crowd is often wrong on Monday morning…
As markets open, traders are still digesting news from the weekend and figuring out what to expect in the days ahead. The thing is, without any actual trading data to rely on, they’re pretty much making blind guesses.
My sentiment indicators zero in on this uncertainty, giving us a glimpse into how it could develop as the week goes on. That’s where the strategies come in.
1. The Momentum Play: Our most basic play is the momentum play. It anticipates a specific direction the market will go during the week, using a single binary to play it.
For instance, we can expect Germany’s DAX index to go up between Monday and Friday. Or we could anticipate the Japanese yen to lose value.
Sometimes we’ll do a momentum play if we think the crowd’s sentiment is on target — reality will meet their expectations.
In February, my readers had the chance to play binaries in oil. Crude was selling for close to $97, but I predicted a sharp spike. To play it, I recommended buying a crude oil 100.25 binary — meaning oil would have to jump over $3 a barrel to pay off.
Since it seemed like a long shot, the binary cost us just $12. Oil prices spiked overnight… and by Tuesday are binary was worth $21. The prudent thing to do was sell the position and collect our 24-hour gains of 68%.
2. The Breakthrough Trade: Sometimes my sentiment indicators predict a big move… but can’t be sure of which way the move will go. So we can “bracket” the market with a breakthrough trade.
To do that, we buy a binary with a strike price above the current spot price, then sell-to-open a binary below the spot price.
For instance, on the morning of December 5, 2011, the DAX was trading at 6130. But that week European leaders were scheduled to meet to discuss a solution to Greece’s debt crisis. So it was pretty clear to me that the DAX would react.
Of course, the outcome of the European meeting wasn’t clear. Leaders could agree on a plan… or go home after reaching a complete deadlock. Since the market would react violently in either direction, we put on a breakthrough trade.
3. The Range Trade: The markets are always moving… but they don’t always move far. During a slow news week, for instance, prices can keep on a steady track as investors seek to figure out where things will go next.
If my sentiment analysis reveals the indexes, currencies and commodities that are most likely to stay put for the week, we use that information to put on a range trade.
The mechanics are the exact opposite of a breakout trade. You sell a binary with a strike price higher than the spot, then buy a binary with the strike price below the spot.
For a range play, you want both binaries to pay out. That is, for the spot to stay below the upper binary and above the lower binary.
The interesting thing is that there’s almost zero chance that the position will expire completely worthless — if one side loses, the other side naturally wins!
These strategies give you the best chance to make big gains while keeping your risk firmly in check.
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