Wednesday, October 28, 2020

Markets Take the Stairs Going Up, and the Elevator Going Down

 



When markets rally, it's usually a slow and deliberate climb on the way up. Just like taking the stairs walking up in a high-rise building. When markets sell off, the drop is usually fast and steep, just like taking the elevator on the way down.

Let's look at a daily chart of the US 500 Index.




Look at the difference between the length of each green daily candlestick on the way up. You will quickly notice that they are much smaller than the red candlesticks on the way down.

It's also important to note the relationship of the markets in relationship to  the "T-Line" (8 EMA), which is plotted in purple. On an uptrend, the market travels above the T-Line. On a downtrend, the market travels below the T-Line.

Finally, Stochastics (set at 12,3,3) can help you identify when markets are overbought or oversold, signaling a potential reversal. When it's above the 80 line, a move to the downside is imminent. If it's below the 20 line, a rally back to the upside is also imminent.

Election Week - What's happening?

The US Equity Indices (Dow, Nasdaq, S&P 500, Russell 2000) all broke sharply below the T-Line which suggested that strong selling pressure was in progress.

You can argue all day long as to why that is happening. Covid-19 surge, Stimulus deal delayed, Election-Day jitters prompting a wave of profit taking, or maybe a combination of all. To me, none of that matters. The charts graphically depict investor reaction to the events of the day.

How to trade this?

For my part, I have been extremely cautious over the past 2 weeks. While I trust the market's relationship with the T-Line, I'm also aware that markets can reverse sharply on a tweet.

So, I have consciously made the decision to reduce my exposure to risk through the General Election.

With Nadex, there are a few ways to do that:
  1. I can reduce the number of contracts I trade, thus limiting the amount of capital exposed to risk.
  2. I can adjust my risk per trade, risking less per contract for a greater reward.
  3. I can do both of the above
Stocks take the elevator going down, and this week has been a classic illustration of that adage.

On Tuesday evening at 6pm ET, Nadex opened with fresh new strikes for the following day. The markets closed bearish that day for the 2nd consecutive day, so the decision was made to follow the prevailing down trade, but also to choose a strike price that would reduce my exposure for risk, while maximizing potential gain.




I placed Limit Orders for the following US Equity Indices:

  • US 500 (Dec) >3363.0  Max Risk $40, Max Reward $60 per contract x 5 contracts
  • US SmallCap 2000 (Dec) >1570.0  Max Risk $30, Max Reward $70 per contract x 5 contracts
  • US Tech 100 (Dec) >11460  Max Risk $30, Max Reward $70 per contract x 5 contracts
  • Wall St. 30 (Dec) >27120  Max Risk $20, Max Reward $80 per contract x 5 contracts

  • I also placed 2 trades on Forex pairs. One trade one, the other was losing. They cancelled each other out.

    In total, I had $600 tied up in risk on the US Equity Trades.  By 8:30am ET, I closed those trades out for $965, representing a 160 percent return on capital risked overnight.

    Not a bad trade to wake up to. I decided to cash out with a handsome profit simply because there was no way of telling what the markets would do after the Opening Bell.

    This was a low risk, high reward approach to trading uncertainty in the week prior to the General Election.




      Thursday, October 15, 2020

      Using Knockouts to Trade the "Rubber Band" T-Line Trade

       

      In my last blog post, I talked about the "Rubber Band" T-Line Trade.

      While I'm not crazy about the name of this strategy, it does depict the relationship betwen the 3 Exponential Moving Average (EMA)against the T-Line (8 EMA).

      These 2 moving averages track along with each other, but the 3EMA occasionally gaps away from the T-Line. When that happens, just like a stretched rubber band, it always snaps back.

      You can catch some very nice price moves with Nadex, risking very little for a potentially nice gain. All you need to do is spot the gap away, and then look for the snap-back to happen.

      Today the  US 500 was on a down trend, and the 3 EMA was Gapping away from the T-Line on the 4-Hour charts.













      Notice how the Green 3 EMA gapped down away from the purple T-Line. Just like it has done in the past, the market was trying to make its way back to the T-Line.

      That's when I decided to try doing a Nadex "Knock-Out" Trade.












      Knockouts resemble traditional futures trades, with the exception that they have a hard floor and a hard ceiling. 

      In today's case I decided to go long at 11:41am from 3459.9. I chose the 3440-3490 Knockout spread. My maximum risk was approximately $200 for a maximum $300 reward. Each tick the market moves is equalized at $1.

      If price travels through the floor of the Knockout bracket, then I'm knocked out for the maximum $200 loss. If price travels through the ceiling of the knockout bracket then the trade closes, and I collect the maximum $300 profit.

      You are not married to the trade. You can exit any time you want to lock in profits or to pare losses.

      In this case, my profit target was a touch of the T-Line, about 70 or so ticks away.












      Sure enough, the market ground its way back up to the T-Line and I exited for a 65 Tick profit, or $65 on one contract traded.

      There are lots of ways to trade with Nadex, and Knockouts can be a nice way to capture sudden price moves.

      Wednesday, October 14, 2020

      The "Rubber Band" T-Line Trade

       
















      What happens when you pull back on a rubber band? It snaps back, right?

      The same happens with price in the markets when you plot the 3 Exponential Moving Average (EMA) and 8 EMA on your charts. 

      The 8 EMA, also known as the T-Line, is an excellent indicator for determining whether a market is on an uptrend or on a down trend. Simply put, if price is traveling above the T-Line, then you are in an uptrend. If price is traveling below the T-Line, you are in a downtrend.

      The 3 EMA tracks along with the 8 EMA, but every time it gaps away too far, it snaps right back to the T- Line, as seen on the chart below.













      Notice what happens every time the 3 EMA (plotted in green) gaps away from the purple T-Line. It snaps back like a rubber band. In fact, the further it gaps away, the harder it is more likely to snap back.

      This can provide some excellent trading opportunities if you spot the 3 EMA gapping away from the T-Line.

      In the daily chart above you can see that the US 500 futures are bullish, but also gapping above the T-Line. Looking at the intraday 15-minute charts, the US 500 started to plunge. 

      Knowing where the market had the potential to drop to, I chose to SELL the US 500 with Nadex Binary Options as soon as price started to plummet at a price level nearer to the T-Line.












      This was a low-risk, high reward trade. I sold 5 contracts, risking $14 to make $86 per contract with a daily expiry of 4:15pm ET. My maximum risk was $70 for a maximum reward of $430.

      Within 90 minutes, the market dove through my strike price and kept diving, like the rubber band snapping back. This trade was flashing a profit of $398.75 and I opted to close the trade for a 560% return on capital risked with in 90 minutes.

      When you plot the 3 EMA and the 8 EMA on your charts, it will expose some prime opportunities to capture fast intraday price movements.


      Wednesday, September 23, 2020

      Using the 80 Percent Rule in Your Trading

       
















      If your charting platform supports Market Profile or Volume Profile, then there is a way to identify potential large moves in price during the day. 

      Volume/Market Profile shows you where 70% of the previous day's transactions occurred. Without getting too deep into Volume/Market Profile, there is one trading strategy called the 80% Rule.



      In this 15-Minute chart of the emini S&P 500 futures, the gray box represents the Value Area Box. Again this box depicts where 70% of price volume occurred during the previous day.

      The 80% Rule

      If price enters the Value Area Box and remains inside the box for an hour or so, then there's an 80% chance, that price will travel to the other side of the box.

      In this example, price dropped down and penetrated through the Value Area Box at 10:45am ET. By noon, it had traveled down halfway through the box.

      Anticipating a move to the bottom of the box, I selected a strike price at >3265 for a SELL order, near the bottom of the box.

      Since the >3265 strike price was well below the price at around noon, I was able to place the trade with low risk for high reward.

      Contract Details:

      11:58 EDT: SELL US 500 (Dec) <3265 for $78.75 per contract
      Trade Expiration: Daily at 4:15pm EDT
      Number of Contracts: 10
      Max Risk, per Contract: $21.25 for $212.50
      Max Reward per Contract: $78.75 for $787.50

      Here's what happened...




















      After moving against me briefly on a pullback, price took a hard dive through the bottom of the Value area box and blew through the strike price.

      At 3:01 EDT, I decided to Exit the trade, with a BUY for $10.25 for a $68.50 profit per contract traded, or $685.00, less exchange fees of $20.

      The 80% rule can provide a great opportunity to capitalize on price movement if you spot the opportunity.

      Friday, September 4, 2020

      Riding a Rollercoaster Week

       


      The U.S. markets had been on a nice, steady progressive uptrend for the past several weeks.

      Wednesday was no exception and then the markets gapped-up huge. Would the bull market continue on Thursday? To my way of thinking, why not. I placed my bullish orders on all the US Equity Indices, risking $50 to make $50 per contract. 

      A shared my bullish market out look with a mentor, Stephen Bigalow. He advised me to be careful, explaining that a large gap-up can also result in profit-taking coming in. While I had the opportunity to back out of my orders for a tiny loss, I decided to stay in the trade.

      Stephen was right, and I got run over. When I woke up in the morning, I was deep in the red. All of my trades closed for total losses. In all, $1,500 was lost.

      While that hurts, there was a silver lining to this trade.

      1. With Nadex, there is a maximum risk on every trade. Sure, I lost $50 per contract, but in Thursday's free-fall, it could have been much, much worse. I'm sure many futures and stock traders felt run over.
      2. I only exposed 2% of my account on each trade. I can recover from that.
      Sure, Thursday sucked. But I was glad that I stuck to risk management. Losses happen.

      Okay, On to Friday...

      Here was my thought process for Friday:

      "Bull Markets take the stairs on the way up. Bear Markets take the elevator on the way down."

      With the steep selloff on Thursday, I expected continued profit-taking going into the Labor Day Weekend. This got me thinking about placing some out-of-the-money SELL trades on the indices.

      At 6pm ET, when Nadex opened on Thursday night. I placed limit SELL orders on the four US indices,  at strike prices where I could get $25 risk for $75 reward. 

      SELL US 500 (Sep) >3428 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450
      SELL US SmallCap 2000 >1541.0 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450
      SELL US Tech 100 (Sep) >11608 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450
      SELL Wall St. 30 (Sep) >28150 @ $75 (6 Contracts)  Max Risk: $150  Max Reward $450

      The Opening Bell was working against me, and then, sure enough, the bottom dropped out.

      In just over an hour, most of my trades were up big, resulting in a $1,410 available profit out of a maximum total of $1,800 available.

      With 5 hours remaining in the trading day, I opted to cash out. In just a few hours, I was able to recoup almost all of the losses from the previous day.

      4:15 Daily Expiry Values

      SELL US 500 (Sep) >3428 Closed at 3418  Max Reward $450 would have been achieved.
      SELL US SmallCap 2000 >1541.0 Closed at 1531.5  Max Reward $450 would have been achieved
      SELL US Tech 100 (Sep) >11608 Closed at 11550  Max Reward $450 would have been achieved
      SELL Wall St. 30 (Sep) >28150  Closed at 28070  Max Reward $450 would have been achieved


      Monday, August 31, 2020

      A Simple Way to Understand Trading Nadex Binary Options

       


      Football season is finally happening, at least for some colleges. And in this example, you're at a sports bar watching Navy play Air Force. 

      You're rooting for Navy, and your buddy sitting next to you went to the Air Force Academy.

      After a little bit of friendly smack talk, you decide to place a wager on the game. Both teams are evenly ranked by the oddsmakers.  Each of you places $50 on the bar. If Navy wins, then you're right, and you pick up the $100 on the bar. If Air Force wins, your buddy picks up the money, and you collect nothing.

      That's exactly how Nadex Binary Options works.

      You have an opinion about where price will finish, relative to a price level and a fixed period of time. For example, your statement could be:

      The US 500 Index will finish ABOVE the 3504 Price Level when the market closes today at 4:15pm ET.

      Using the football analogy above, you decided to put up $50, which is deducted from you trading account. For this trade to be accepted, someone needs to take the other side of the trade for $50.

      If the market closes a hair above 3504 at 4:15, you collect $100*
      If the market closes at or below 3504 at 4:15, you collect $0*


      With Nadex Binary Options, every contract must add up to $100 to be an active trade:

      • If your maximum risk is $40, then the person on the other side of the trade is risking $60
      • If your maximum risk is $55, then the person on the other side of the trade is risking $45
      • etc., etc.
      IMPORTANT NOTE: YOU ARE NOT MARRIED TO THE TRADE

      In most cases, you can exit a trade if you want to lock in a sure profit, or to minimize losses if a trade starts moving against you.

      How does Nadex make their money? Nadex makes money by charging an exchange fee of $1.00 per contract, per side to facilitate trades.

      In this trade example, the US 500 Market had been on an extended daily uptrend, closing at 3503. The belief was that the trend would continue on it's upward grind, as it has done the past 9 out of 10 days. The closest daily strike price was 3504. The decision was to to go long from 3504, risking $50 to make $50. and the order was filled.

      TRADE RESULTS

      The US 500 Closed at 3496, below the 3504 strike price. Although there were plenty of opportunities to exit this trade for a partial profit, I opted to stay on the side of the uptrend and let the trade ride. 

      Payout $0, for a $50/contract loss.



      Tuesday, August 25, 2020

      A Simple Way to Follow a Trend with Nadex

       


      Since the Covid-19 Market Selloff in the Spring of 2020, the US Equity Indices have made a steady, rebound. Looking at the charts, the uptrend shows that roughly 7 out of 10 trading days are bullish, compared to the previous day.

      Let's take a look at the emini Nasdaq (/NQ) Daily Chart.


      This chart is grinding steadily upward, riding above the 3 EMA, the T-Line (8 EMA) and the 50 and 200 day Simple Moving Averages. With this kind of uptrend, you just want to stay long until the market closes below the T-Line.

      Here's a simple, set-it-and-forget-it  way to trade this uptrend with Nadex. The simple proposition is that the /NQ will close tomorrow ABOVE today's close.
      1. Record the previous day's close. In this example it was 11636
      2. At 6pm ET, when Nadex opens, find the Daily Expiry (4:15pm) strike price nearest the previous close. In this case, the strike price was 11632
      3. Place a Limit/GTC Order to BUY the US Tech 100 (Sep) Index  >11632 for $50 per contract.
      4. Select the number of contracts you wish to trade. For any trade I make, I like to be as close to 2% account risk per trade. This is a demo account with a $16,000 balance. 2 percent is $300, so 6 contracts were purchased.
      5. Maximum Risk is $300 on this trade. Maximum reward is also $300 (less exchange fees).
      6. Place the Limit order and wait for it to fill.
      Let's see how this trade is playing out:


      • The Limit Order was placed at 6PM ET Monday Evening
      • The Limit Order filled at 7:15am Tuesday Morning.
      • After taking some heat at the Opening Bell, the trade moved up sharply.
      • With 4 hours, 51 min. remaining in this trade, it is up $168 out of a maximum $300 available.
      I'm going to let this trade run until expiration. All it has to do is finish 1 tick above 11632 to collect the maximum profit of $300 and to confirm the resumption of the bullish uptrend.

      If the NQ settles at or below 11632, then I collect $0, and I forfeit the $300 I put up as risk money to secure the trade. It will be a small 2%  loss against a trend where the odds were on my side.

      Trade Conclusion


      This trade took a little bit of heat in the morning, but took off in the afternoon settling at 11726, well above the 11632 strike price. Maximum profit of $300 was collected (less exchange fees), for a 100% return on capital risked.