Okay - I have been trading the butterflies on the indices around the lunch hours, and wanted to branch out a bit. What I wanted to figure out is if there is a way we can use the dev level indicator to help us decide if it is the right time to enter a butterfly trade. Obviously, if that is 68% (I think) of the expected move, it should help us.:)
Also, I was trying to figure out if there was a method to help us maximize premium and make it easier to figure out which strikes to select.
So I did a little testing from 22OCT to 6 DEC to see if there was a way to help refine butterfly entries on EUR/USD. What I originally saw just by looking at the charts was that the EUR/USD generally goes range bound around noon ET, and stays within a fairly defined range. Then I decided to collect the actual numbers to see what happens...
I think I may be over thinking this, but it is always nice to have numbers to back you up...
So, the idea was to develop some method that has defined parameters that can be reproduced and followed to make trading decisions. I decided to see what the range was from the 1200ET bar open on a 10 min, and see what the average up and down move was from that open until 1600.
What I found was this:
1) 24 of 32 trading days had a 1 dev move by 1200 ET. I didn't take data if it hadn't made the move, and I didn't start collecting if it made the move after 1200ET. The move had to be made before 1200ET.
2) The average total move from High to Low during the 4 hour span if condition 1 is met was 23.4 ticks.
3) I then looked at what the average move was from the 1200ET open to the session (1200-1600) high, and the average from open to close. I decided to drop the top 3 and bottom 3 (25% total) from the average (like NADEX does when figuring settlement). What I found was:
Average move from open to high: 21.3 ticks
Average move from open to close: 10.5 ticks.
So, what (with this limited test) there seems to be a defined pattern for butterfly trading on the EUR/USD:
1) the EUR/USD has to make a full deviation move prior to 1200 ET to be considered valid
2) there should be no news releases during the session
3) If conditions 1 and 2 are met, then do the following:
a: plot a line 20 ticks above the 1200ET open,
b: plot a line 10 ticks below the 1200ET open
4) When selling the upper leg of the butterfly, choose the next strike higher than 20 ticks above the open. Enter the trade when the underlying reaches 20 ticks above the open. Use either an Intraday or Daily strike, whichever gets you closer to the target strike. Manage as appropriate....
5) When buying the lower leg of the butterfly, choose the next strike lower than 10 ticks below the open. Enter the trade when the underlying reaches 10 ticks below the open. Use either an Intraday or Daily strike, whichever gets you closer to the target strike. Manage as appropriate....
6) If the underlying doesn't reach desired entry level, don't enter.
is the chart setup. The blue vertical dash lines are the session time (1200ET to 1600ET). The lower green circle is to confirm that the 1 dev move has been made. The upper green circle is the session open time. The 2 solid red lines are the upper and lower boundaries (20 and 10 ticks from open). The 2 dash red lines are 75% of the average move (15 and 7.5 ticks) to possibly further test....
Out of the 48 trades in this test 44 expired ITM (91.7%).
Darrell- is the methodology correct on this? Understood that it would need more testing to get more data and truer average numbers. But, could it be used or refined to help people pick better strikes on butterflies for other instruments?
I'll send the spreadsheet in a help ticket to add to the thread.
Thanks for the help.