My Youtube channel, Trading & Wealth Management

What is max pain theory? EUR/USD analysis for 11-15 February, 2019

      Last week I got a lot of emails with different questions. So, today I would like to start my post answering some of them. Few questions were about max pain theory. First of all, let me explain the basics. Max pain price is the strike price with the most open contract puts and calls. That means options sellers will lose money if the market reaches strike price. As you know it’s banks, funds, etc. Obviously, these guys don’t want to lose and they will do all possible to keep prices away from strike level manipulating main assets (stocks, commodities). Theory suggests that most of retailers (option holders) will lose money till expiration.
     It’s not right to use this theory as the basis of your trading strategy. However, for trading some of financial instruments it can be useful as a tool to adjust your sl and tp. Many oil traders do so. You can check some data – for example, 2 weeks ago max pain price of oil calls was at $57. Based on fundamental and technical analysis, we were looking for shorts. Those of traders, who trade with wider sl could use max pain price as sl level. But never use this theory as a reason to buy or sell. As a trader you need to see the bigger picture, understand the money flow, etc. Then use technical analysis to find good entry. And at the the last, consider max pain price to adjust sl and tp (if you really want to use this theory). This is it and nothing more. Now let’s talk about EUR/USD.
    Strong labor market in the US and weak data in EU gave a nice impulsive wave down last week. So, congratulation to all, who followed my previous EUR/USD analysis. I would like to see a pullback to 1.1400 before reaching 1.12400. But I have admit, that pressure is very big. So, keep in mind possibility of smaller pullback or some consolidation in tight range. I think Asian session tonight will give us clearer vision. So, watch price action first. Our swing targets are still intact – 1.11650 and 1.11200.
 
Wish you all profitable week!