Trading with Wider Stops and Less Risk for Pennies on the Dollar
By Darrell Martin, ApexInvesting.net
If you are a futures or Forex trader, this chapter will show you a strategy to reduce your risk to the current strategy you are trading. Stock traders sometimes buy puts to hedge their risks, but what about Forex traders or futures traders? The strategy in this chapter will discuss using Nadex as a hedge against risk for futures and Forex trades.
In this article, you will learn the following concepts:
- The three important things you must know to begin making money in trading.
- How to reduce risk by up to 75% or more while having stop/losses that are up to 400% or more larger than what you use now to decrease the probability of getting stopped out by a spike in the market.
- How to get stop/losses for pennies on the dollar with the Whipsaw Elimination Strategy.
- How to hide your stops from the market with the Ultimate Hedge Strategy.
- How to find the right spreads for your trade.
- How to know how far the market will move today
But first, let’s take a look at a fairly typical trade setup:
The chart above is the GBP/USD, but it could be any market. You plot a trend line and see a bearish trend. You identify a pullback for an entry signal. You exercise caution and set your stop/loss above the highest candlestick. Your risk is 65 pips or $650 dollars, so you are prudent in setting your stops, but there is a greater amount of risk capital in play. And then this happens:
This really hurts. The market starts threatening your stop/loss. What do you do? Move your stops, take the hit? Go long because there is a trend reversal? And the worst part about it is that it is a slow, agonizing march toward your stop/loss. So you take the hit, and lose $650. And then the market decides to slap you in the face.
Your initial instincts were right. The market was in a downtrend, but it decided to spike upward and stop you out before it made its move downward. The net result is that you lost $650 dollars. This chapter will show you how to prevent this from ever happening in the future. You will learn how to place the exact same trade, use less money and never get stopped out again. You can combine this strategy with your current Forex strategy to create a massive stop/loss for a fraction of the cost.
To make money in trading, you need to master three things:
- You need to lean to reduce your risk.
- You need to increase your leverage
- You need more time to be right.
In the trading example above, the trade had $650 dollars of money at risk, and as soon as you made it, the market spiked and took you out. You were right, but you needed more time to be right.
Trading futures, options and Forex can be very expensive. Traders can be required to have upward of $30,000 on hand to fund accounts and have considerable amount committed to margins. This is where Nadex comes in very nicely, as the table below illustrates:
Day trading the EUR/USD (Equalized Size 125,000) and other instruments requires considerable capital to fund an account, margin requirements are high, and leverage varies. When you look at the table above, you can easily see a comparison of trading the same instrument across multiple trading platforms. The significant advantage of Nadex is reduced capital risked, a huge leverage advantage, and best of all, you can’t get stopped out in a trade.
Other benefits of using Nadex as a trading platform are:
- You can’t lose more than you put up in margin. The amount of cash you risk is your margin.
- You still get very good leverage
- You can trade stock indices, popular commodities and Forex pairs.
- Price is driven by the underlying market.
- Every pip is worth $1.00 per spread bought or sold.
- Nadex is an exchange that facilitates transactions between buyers and sellers.
- Nadex is regulated by the CFTC, and does not take a position in any market.
Let’s talk about some basics to trading Nadex spreads:
- A spread is defined by a floor and a ceiling. In this EUR/USD example, the spread is between 1.2400 and 1.2500, which is 100 pips. Each pip is worth $1.00, so the spread is worth $100.
- If the price moves above the ceiling or below the floor of the spread, you can’t get stopped out. Nadex spreads are based on a defined time period that you choose, and the trade is active until expiration of the contract.
- Using this example, if you SELL at 1.2490 and the ceiling of the spread is 1.2500, your maximum risk is 10 pips or $10. Remember, with Nadex, your risk is your margin. If you placed the same trade on Spot Fx, your margin would be $250.
- Since the spread is 100 pips and you are risking 10 pips, your maximum profit is 90 pips if the trade ends at the floor.
- If you BUY the spread at 1.2410, it’s the exact opposite. Your risk is 10 pips from the floor of the spread, and your maximum profit is 90 pips above.
- You can close the spread any time you want to before expiration to capture profits or limit losses. When the contract expires, remember that you are trading an underlying market, and not physical commodities for example. Corn will never be delivered to your doorstep if you trade corn futures on Nadex.
- Your profit is the difference between your strike price and the price of the market at the expiration of the contract, or the price of the contract if you close the spread early. If you BUY this spread at 1.2410 and it settles at 1.2480, then the difference is 70 pips, and $70 is deposited in your account, usually within a matter of seconds.
- There are a wide variety of spreads and timeframes to choose from in Nadex. Choose the spread that works the best with your trading plan and risk/reward tolerance.
Duration and Expiration of Nadex Spreads
Nadex offers a wide variety of spreads, both in terms of markets you can trade (indices, commodities, Forex) and time intervals:
- Intraday - as little as every 2 hours. Time frames can depend on the markets being traded. Forex trades are available in the overnight hours when the commodities and some indices are closed. All times listed on Nadex are Eastern daylight time (EDT)Some spread times can include:
- 8am-10am EDT
- 9am-11am EDT
- 10am-12pm EDT
- 11am-1pm EDT
- 12pm-2pm EDT
- 1pm-3pm EDT
- 2pm-4pm EDT
- Expiration and Settlement
- Days of expiration
- Time of settlement (All quoted in Eastern time)
- Spread Range/Width: Distance between the floor & ceiling of the spread
- No: of contracts: Number of spreads per expiration, per range. For example, you could have one in the middle, one high and one low.
- Trading Hours: Times when new trades can be entered, and when open trades can be closed before settlement.
- Commissions: Since you are placing an order on an exchange without a broker, there are no commissions charged. There is an exchange fee of $0.90 cents per $100 contract, per side. You are not charged a settlement fee if your contract expires out of the money. If you trade one $100 contract successfully, you are charged a $0.90 to execute a trade and $.090 to settle the successful trade for a total of $1.80 in transaction fees. Transaction fees are capped at $9.00 per side. If you trade over 10 contracts on a transaction, your transaction fees are capped.
The chart above shows the overlap of five Nadex spreads. The longer you have until expiration, the wider the spread:
- Daily: The yellow background is the Daily Spread between 1.2700 – 1.3300 ($600)
- 8 Hour: The blue spreads are two 8-hour spreads:
- 1.2875 – 1.3125 ($250)
- 1.2750 – 1.3250 ($500)
- 2 Hour: The Orange spreads are two 2-hour periods
- 1.2950 – 1.3050 ($100)
- 1-2900 – 1.3100 ($200)
Nadex offers binary options and spreads on the following markets:
The Whipsaw Elimination Strategy is simply using a Nadex spread. As long as a spread is active within a defined time period you can’t get stopped-out.
The Ultimate Hedge Strategy
Now that we have a basic understanding of Nadex spreads, we will apply Nadex spreads to help you get stop/losses for pennies on the dollar. You will also learn:
- How Nadex spreads work
- Nadex spread example
- How to find the best spreads
- How to know how far the market will move today
Let’s go back to our original example:
We identified a trend, placed our trade, set a conservative stop/loss, and got stopped out on a market spike before the market continued downward. We lost $650. Let’s look at the same trade, using an 8 hour Nadex spread:
A Nadex spread was available with a ceiling of 1.5700 and a floor of 1.540 (250 pips). If you sell 10 contracts at 1.5665 then your maximum risk (and margin) is 35 pips or $350. In the previous example, our risk was $650, and our margin requirement was $3,138. In the Nadex spread, we didn’t get stopped out and took a $750 profit within 8 hours. In the previous example, we got stopped out immediately on a market spike and lost $650. We satisfied the criteria for making money discussed earlier in this chapter. We risked less money, we had better leverage, and we had more time to be right. Here is the side-by-side comparison of trading a Forex spot trade vs. making the same trade with Nadex spreads:
Here’s another way to look at the original trade in this chapter. What would happen if we took our original Spot Forex trade, went short and hedged it with a Nadex spread instead of a stop/loss?
A Nadex spread is available with a floor of 1.5700 and a ceiling of 1.5950 (250 pips). You buy the spread at 1.5710, which becomes your margin, and you risk $100 instead of $650. When the market spiked, you had a 240 pip Nadex insurance policy protecting your trade. The market continues downward to your profit target. Your gross profit is $960, less your $100 Nadex spread loss for a net profit of $860.
If you trade Forex or futures, you can trade the way you normally do do, but use Nadex spreads to minimize your risk.
Using the Apex Investing Institute Website to Help You Find the Right Nadex Spreads to Trade
Video: For a brief and concise tour on how to find the BEST Nadex Binary and Spread Opportunities, Click Here
If you sign up as a member on the Apex Investing Institute website, you will have free access to a wealth of information to help you identify the right Nadex spreads and binary options to trade. They also have tools to help you learn how far the market thinks it will go in any given trading day. The graphic above is a screenshot of the Apex Nadex “Spread Scanner” utility which will return spreads to you based on the money you are comfortable risking, your expected reward and the time period you are looking for. Apex also offers free chat rooms for their members and several services which can be purchased at a reasonable price if you need them.
Nadex spreads are an excellent way to trade with less risk, get better leverage, and they buy you the time to be right. Since you are placing your orders directly on an exchange without a broker, you don’t pay brokerage commissions, just exchange fees. You can’t get stopped out during a trade, and you have the flexibility to exit a trade at any time before contract expiration.
If you trade futures or spot forex, Nadex spreads allow you to trade the way you normally trade, but they can buy you stop/loss protection for pennies on the dollar. There are no large margin requirements with Nadex. Your risk is your margin.
Nadex is regulated by the CFTC and is currently only available to legal US residents. To get a free 2-week Nadex demo, funded with $25,000 worth of play money, click here.
Click Here to watch Darrell Martin Fully explain how to use Nadex Spreads to Buy Stop/Loss Protection for Pennies on the Dollar.
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