Saturday, July 1, 2017

The Germany 30 "Strudel" Strategy Revisited

After a few years blogging exclusively for Nadex, it's time to dust off my personal trading blog.

For starters, I'm going to re-visit a strategy that I first discovered in June of 2014.

I was editing a project from Tom Busby, founder of DTI, and he made an interesting observation about the Germany 30 (DAX) index:

Busby observed the following:

"The 7am EDT hourly candle of the DAX usually controls the direction of the following hourly candlestick(s)."

That's just about as binary an observation as it gets. Here's a chart from last week that illustrates what I'm talking about:


















Click on Chart to Enlarge

The red arrows highlight 7am hourly candles. Notice what happens to the 8am candle more often than not.

I traded this strategy with binary options for a couple of years and it caught on, most of the time. My rules were simple.

  • Select the 7am-9am EST Nadex time period for the Germany 30 (DAX) Index.
  • Once you are 100% convinced that the 7am EDT hourly candlestick will be  BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of hourly candlestick.
  • Once you are 100% convinced that the 7am EDT hourly candlestick will BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of hourly candlestick.
  • The safest way to execute this strategy is to wait for the 7am hourly candlestick to completely close before you make a decision to BUY or SELL. Markets can get whippy, and one of the most common mistakes made with this strategy is to pull the trigger too early on the trade. Patience is key.
But here was the problem:

The strategy worked too well. In time, nobody wanted to take the opposite side of that binary trade. Binary trades that used to pay $50 rewards started having a max profit of $25 or less. So I got tired of risking too much for little in return.

Trading this Strategy with Nadex Spreads

Using the rules above, I enter a BUY or SELL ATM Nadex Spread at 8am based on how the 7am hourly candlestick closed:


















Click on Chart to Enlarge

In this example, the 7am hourly candle closed slightly bearish triggering a SELL. At 8:01am an ATM Spread was taken. I closed out the trade after a 24 tick gain, or $24 per contract traded.

What I Like About this Strategy

From my observation, this strategy is good for capturing ticks in a relatively short period of time. If the market moves against me, it is rarely a large reversal, but it is also easy to get out of the trade.

When I Decide NOT to Take the Trade
  • If the 7am Hourly Candle is a Doji
  • If there is a MAJOR economic news event at 8:30
  • If the 7am Hourly candle is AGAINST a major uptrend or downtrend

 Here's an example

























The 7am hourly candlestick is bullish against a steep downtrend. Simply a pullback. If I was a buyer in this example, then I'm trading against a strong prevailing trend. 


The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. Currently, I am the Content Manager for Sir isaac Publishing, and I publish articles in well over a dozen websites, as well as working on eBooks and other projects.

Every week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

Tuesday, March 29, 2016

What The "Shawshank Redemption" Taught Me About Trading

"Geology is the study of pressure and time. That's all it takes really, pressure, and time. That, and a big goddamn poster."
- The Shawshank Redemption


In the Shawshank Redemption, one of my favorite movies, Andy Dufresne spent 20 years of his life tunneling out of Shawshank prison by depositing one pocketful of gravel into the prison yard every day. He quietly and methodically tunneled his way out of his cell using a rock hammer. A giant poster of Rita Hayworth covered up the tunnel entrance in his cell. With patience and persistence, he managed  to reach his goal while nobody else was watching.

There's a lesson to be learned from this movie in trading. It's not necessarily about big winners, rather it's having the patience to stick to a reliable trading plan, and to deposit a pocketful of money into your account every day.


With roughly 252 trading days available every year, if you have a plan that consistently adds $20 per day to your account, you would wind up with an additional $5,040 in your account, less exchange fees. If you put 5% of your account at risk on high probability strategies, that number can actually grow higher, and that's after one year. Of course taxes will come into play, but you're still ahead of the game.

Over the years, as your account grows, this mindset could potentially produce far greater gains. But the basic principle is the same - depositing a handful of gravel in the yard every day.


I'm not going to bother with compounding arithmetic, but the yields associated with this mindset can be far greater than passbook savings, CDs or other low-yielding investment vehicles.

When you trade with Nadex, there are multiple strategies that can offer a $20 maximum reward against $80 risked. The probabilities are very high, and the rules are simple and straightforward. If you trust the probabilities and the setup is there, it can be a relatively stress-free way to trade. 

And another pocketful of gravel is deposited in the yard.



The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.


Monday, March 21, 2016

Monday, March 21 Nikkei 20-Minute "Kanpai" Trade

Last Thursday, I reported about the first 20-Minute trade on the Japan 225 (Nikkei Index). So I decided to give it a try again today.

The rules for the trade are pretty simple, but the key is to be ready at 8pm EDT sharp, because this trade can get away from you fast.

Today was no exception, and I almost missed the boat. For more information on my ground rules for taking this trade, click here.

To be honest, I wasn't crazy about the setup . There wasn't a big move in the US Indices, and the E-Mini S&P 500 (/ES) futures were traveling sideways going into the 8:00pm hour. So I pulled up /ES futures on the one minute charts, and pulled up the Nadex Chart for the Japan 225 Index on the one minute charts.

First the 1-Minute Chart on the E-Mini S&P 500 Charts:





















As soon as the 8:00 hour arrived, the /ES started making a move to the upside after a couple of Dojis. Now it was time to see how the Nadex Charts reacted:


















The Nikkei moves a little more violently. At 8:03, the Japan 225 was already moving up very quickly. The best OTM BUY strike was 17906 $34, and I took it. If my reaction time had been better, I might have gotten it cheaper, but I wanted to be a little cautious.

Since the US Indices closed flat today, I wanted to make sure the rise in the Japan 225 wasn't a "head fake". But with the /ES continuing on its climb, I decided to jump in. Two minutes later, the market had blown through my OTM strike price and $38 in profit was on the table.

I debated holding this contract until expiry, but decided to take profit. There were still 13 minutes left in the trade, and in my view, anything could have happened. The market pulled back a little bit, but ultimately rose again and settled ITM at 17955 at the 8:20 Expiry.

If the E-Mini S&P 500 Futures had not made a steady to the to the upside, I would have backed awayfrom taking this trade. But it moved, the Japan 225 reacted, and the OTM trade was there for the taking.

I am going to continue taking this trade if I like the setup, and will be posting results and fielding questions on "Trading the Probabilities", a new Facebook Group I have set up that covers trading strategies I follow.

The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

Friday, March 18, 2016

Trading the First 20-Minute Binary on the Japan 225 (Nikkei) Index

"When Wall Street Sneezes, the Nikkei Catches a Cold"
- Author unknown, so I might have made this up


If you are looking for trading opportunities in the evening, then trading the first 20-Minute Binary Option on the Japan 225 (Nikkei) Index can be an option worth considering.


This is a trading strategy that I like to look at every Monday-Thursday at 8:00pm EDT when the Japan 225 (Nikkei) Index opens up for trading on the Nadex Exchange.

With daylight savings time kicking in, when it's 8pm in New York, it is 9am in Tokyo. The markets have just opened in Japan, just a few hours after the daily close on Wall Street.

Here are a couple of things to know about the Nikkei:

  • The Nikkei index has gained a reputation for being the most volatile traded index, prone to sharp price movements. In 2013, the Nikkei started near 10,600, peaking at 15,942 before plunging 10%, then rebounding. Experts have said that trading the Nikkei is for brave, experienced traders. 
  • Japan’s economy is based on exports, mostly to the United States. This ties the two economies together so that the Nikkei follows the movements of the U.S. markets and indices. 
  • Trading the Nikkei requires keeping a sharp eye on what the U.S. markets are doing. If the Dow rises, the Nikkei will usually follow suit the next day. 
  • Because of this, trading at the right time of day is very important. It’s key to trade in the first hour of the Tokyo trading day to capitalize on trends from the day before. A good general rule is to buy if the Dow went up and sell if it went down. 
  • The Nikkei reacts to world events such as natural disasters, wars, political unrest, and economic news. It is also important to follow economic data from the U.S. and Japan, including unemployment rates, job creation, interest rates, GDP figures, and other economic benchmarks.

    This information came from UFX.com  [Read More]
So what do you do with this information? Here's the way I see it:
  • Focus on days where there has been significant up or down movement at the close the U.S Equity Indices. If the DOW is up/down 200 points or so, and the S&P 500 Futures are up/down 15-20+ points, I'm expecting a reaction at the opening of the Nikkei exchange.
  • Before the 8pm EDT open of the Japan 225 Index on Nadex, pull up charts on the E-mini S&P 500 Futures (/ES). What is the index doing after the close of the market? Is it trending up, down or sideways? If it's sideways, I may not take the trade.
  • At 8pm EDT, I open the Nadex 20-Minute chart on the 1-Minute charts. If Wall Street closed significantly Bullish, I am waiting for a move to the upside. If significantly bearish, I'm looking for a move to the downside.
  • Patience is key. The first couple of minutes can be a "head fake". It can make a burst to the upside, only to make a sharp reversal and dive.
  • After a couple of minutes, if I see you see a sharp move in the Japan 225, then I jump on an OTM strike price, preferably with a risk of $25 or less in the direction of the trend.
  • If the Japan 225 blows through my OTM Strike Price, I have a decision to make. I've probably already gotten a 1:1 return on capital risked or better. It's okay to take profit, especially if the market stalls. If the Nikkei blows through my strike price and continues to move with a head of steam, then I will consider holding the contract until expiration.
That's it. Now let's take a look at what the Nikkei did on March 17:


The US Equity Indices actually closed up significantly, so I had a bias toward the upside, but again, patience is key. On this one-minute chart, the first 2 candles were slightly bullish. But then the Nikkei reversed sharply to the downside.

A quick look at the one-minute chart of the E-Mini S&P 500 Futures market (shown at right) indicated a move to the downside. From my observation of the Nikkei, it has a tendency to track with the E-Mini S&P 500 Futures, but in a more exaggerated fashion. A relatively small S&P bearish candle can correlate to a much larger Nikkei bearish candle.

Can you see how these two indices generally move in the same direction? The only difference is that the action on the E-mini S&P 500 futures is much smoother, while the Nikkei reacts violently.

8:05pm - After a small run-up to 16780, the Japan 225 reversed and dove sharply. It was time to strike and look for an OTM SELL trade with $25 risk or less. A strike was available at 16690 with $20 risk and I jumped on it.

Tip: The Nikkei moves fast, and a quick moment of indecision can kill the trade. I know I need to make the decision and pull the trigger.

8:13pm - The market blew through my strike price at 8:09, and started to trade sideways. Would the market continue its dive or was a reversal about to happen? I was already up $50 against $20 risked, so I decided to exit the trade for 250% return on capital risked. Not bad for an 8-minute trade.

8:20pm - The market never reversed, it continued to move downward slightly. If I had held this trade until expiry at 8:20, it would have settled in the money for the maximum reward of $80 (exchange fees not included).

I am going to continue taking this trade if I like the setup, and will be posting results and fielding questions on "Trading the Probabilities", a new Facebook Group I have set up that covers trading strategies I follow. 

Some Final Thoughts on this Trade:
  • If you've never done this trade before, do it in demo until you have the dexterity and reaction time to pull the trigger and exit a trade if it moves against you. The Japan 225 Index can move very fast and it can turn on a dime. If you don't like volatility, this is not a trade for you.
  • You are placing an OTM Binary Trade. At the time you placed the trade, the marketplace of buyers and sellers was not in agreement with your statement. That's why your risk premium is so inexpensive. The person on the other side of the trade is expecting you to lose and has a lot of money riding on that outcome.
  • I don't let indicators cloud my thinking. I just look for price movement on the Japan 225 and see if it correlates to the same price movement on the E-Mini S&P 500 Futures. If that happens on an uptrend or downtrend on the 1-minute charts, I'm ready to pull the trigger. I don't use trend lines, MACD, RSI or any other indicators to cloud my decision making. This trade moves too fast.
  • Consider taking profit early. There is nothing wrong with a 1:1 return on capital risked. It beats the heck out of a $0 payout.
  • Be prepared to take a full loss. You are only risking a little to potentially reap a much greater return. As mentioned before, the Japan 225 can turn on a dime, and will take your money in a split-second if it moves in the opposite direction.
  • After the first 20-minute Binary on the Japan 225, I'm done. If I make money, there's no sense giving it back. Been there, done that. It's not uncommon for the Nikkei to settle down after the first 20-40 minutes of trading. Then I lose my edge.
And that's why it's important to test this in demo first. Make sure it's a trade you are comfortable taking. If you see a favorable setup, it can be a nice way to end the day.


The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

Thursday, August 13, 2015

A Low Risk, High-Reward Twist on the DAX "Strudel" Strategy with Nadex


Every morning, I trade the the 7am-9am Germany 30 (DAX) strategy with Nadex binary options. I call it the "Strudel" strategy, because it's a delicious breakfast trade. This strategy was based on the observation from Tom Busby, a veteran Futures trader who observed that the 7am EDT hourly candlestick of the Germany 30 (DAX) Index is a pivot point that determines the direction of that market for the following hour a great majority of the time.

The rules for the strategy are remarkably simple:

  • Select the 7am-9am EST Nadex time period for the Germany 30 (DAX) Index.
  • Once you are 100% convinced that the 7am EDT hourly candlestick will be  BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of hourly candlestick.
  • Once you are 100% convinced that the 7am EDT hourly candlestick will BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of hourly candlestick.
  • The safest way to execute this strategy is to wait for the 7am hourly candlestick to completely close before you make a decision to BUY or SELL. Markets can get whippy, and one of the most common mistakes made with this strategy is to pull the trigger too early on the trade. Patience is key.


This strategy has been remarkably consistent. Over the past 60+ trading days, this pattern has repeated itself about 90 percent of the time. Just be patient and watch the 7am hourly candlestick develop. Once it's confirmed bullish, then buy. If it's confirmed bearish, then sell. Again, if you want to be "super-safe", don't make a trading decision until 8am, after the 7am hourly candlestick has closed.
Sometimes the 7am hourly candlestick develops very bullish or bearish in a hurry. When that happens, it may be very difficult to get a trade that satisfies your risk/reward criteria. Today was an example of such a trade.


5 Minute Nadex Chart on the Germany 30 (DAX) Index. Click on Chart to Enlarge.

Looking at the chart above, the market had been on an extended downtrend, opening at 11422 at 7:00am EDT. The market ground it's way upward for the first 15 minutes. Then it reversed and started to dive. The 7am hourly candlestick closed at 11405 - BEARISH.

Under the trading rules of this strategy, that would trigger a SELL from 11429, the first Nadex strike price ABOVE the 7am hourly candlestick. But at 8:00am the market was 25 ticks away from the strike price and continuing to move South. To get an order filled, it would have required me to risk $85-$90 per contract. A little bit too expensive for me.  The MACD was starting to cross over from bullish to bearish, and I felt the downtrend would continue, so I placed two orders: 




The first order was a working order that satisfied the rules of the trade. I sold from the first strike price ABOVE the 7am hourly closed candle, which was 11429. The market looked like it was going to be on a continuation down trend, so I placed another live order to SELL at 11369. For this order to settle in-the-money (ITM) for full profit, the market would need to drop another 36 ticks.

The beauty of out-of-the-money (OTM) trades is that your capital risked is far less than your potential reward. But OTM trades also become valuable when the market starts to move toward your strike price. I had a $30 profit target per contract with my pending order. I also decided on a $30 profit target for my live order.

It looked like the market wasn't going to cooperate with my OTM trade, but I only had $8 risked. Then at 8:55, just 5 minutes before the trade was due to expire, the market dove. My trade was now worth $31 in profit, so I took profit and closed out the trade. Mission accomplished. I hit my profit target.

The market expired below 11369. If I had decided not to exit the trade, I could have picked up $92 instead of $31.  But that wasn't a certainty. As sharply as the market dropped, it could have easily retraced and settled above 11369 at the 9:00am expiration.


The first trade never filled, so there was no trade on my SELL at 11429 with a $30 profit target. Instead I managed to pick up the $30 profit risking only $8 instead of $70.  It was a slightly different twist on my normal strategy, but yielded the same results.


Free Nadex Education Reminder:


  • Thursday, August 13 Advanced Trading Strategies (Part Two) 8pm EST  Register Here

Try this Strategy on a Free, 2-Week Nadex Demo Account!
Nadex is available to trade in 47 countries!

Video: Breakfast, Lunch & Dinner Trades with Nadex
By Cam White, TradingPub







The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

Monday, August 10, 2015

A Lunchtime "Pastrami" Trade on the S&P 500 with Nadex Binary Options


When I think about lunch time on Wall Street, I think of a Pastrami on Rye at a New York Deli. With that in mind, I recently came across a lunch time trade that looks like it could be quite tasty. In honor of lunch time in New York, I am calling this trade the "Pastrami".

A few weeks ago, I was doing some monthly analysis on some of my other favorite trading strategies, when I noticed a very consistent pattern that revealed itself on the S&P 500 Futures market.


Looking at the hourly charts, something jumped out at me. It appeared that the 11:00am EDT hourly candlestick controlled the 12:00pm EDT hourly candlestick with a high degree of frequency. 

Here's what I saw:



Hourly Chart of S&P 500 Futures (Investing.com)  Click on Chart to Enlarge.
Notice the 11am hourly candlesticks above. Can you see that the following 12pm candlestick never challenges the opening price of the 11am candlestick? In fact, the 12pm candlestick tends to continue in the same direction that was established by the 11am candlestick. I back-tested the hourly charts on Investing.com charts for 40 trading days, and the same pattern repeated itself for 36 out of 40 days. That's a 90% probability of a pattern repeating itself. 

The same phenomenon occurs with the 7am-9am German "Strudel" strategy that I have written about extensively. Complete rules for the "Strudel" strategy are included in the free eBook from TradingPub, entitled "Trading Made Simple: Strategies that Risk $100 or Less".

The rules for this new "Pastrami" strategy are very simple to execute:



  • Select the 11am-1pm EST Nadex time period for the US 500 Index on the Nadex platform.
  • Once you are 100% convinced that the 11:00am EDT hourly candlestick is BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of the 11am hourly candlestick.
  • Once you are 100% convinced that the hourly candlestick is BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of the 11am hourly candlestick.
This is a very simple strategy that looks like it can be fairly consistent. Just be patient and watch the 11am hourly candlestick develop. Once it's confirmed bullish, then buy. If it's confirmed bearish, then sell. If you want to be "super-safe", don't make a trading decision until 12pm, after the 11am hourly candlestick has completely closed.

I have taken several trades with this strategy in demo, and I like what I'm seeing thus far. I don't always get filled with my risk/reward rules, but it's rare for a trade to threaten me once I'm in the market. I know that I have a recent 90 percent historical probability of my trade expiring in the money for full profit. That also means I have a 10 percent probability of losing the trade. As long as I risk $80 or less on each trade (my preference is $70 risk), I know that it's very hard to lose money.

Let's take a look at a recent "Pastrami" Trade (Friday, July 31  2015) taken in my Demo Account:

Hourly Nadex Chart on the US 500 Index (Click on Chart to Enlarge)
After three very choppy hours of trading, the 11am hourly candlestick was a battle between the bulls and the bears. Notice the wicks above and below the 11am candlestick. Ultimately, the bears won by a small margin.

Knowing that I had a 90% probability of this trade working out in my favor if I SOLD from ABOVE the opening price of the 11am candlestick, I placed the two trades at 12:13pm, after the close of the first hour of trading. I decided to wait on confirmation of the direction of the 12:00 hourly candlestick, since the 11am hourly candlestick was almost a Doji.


The first trade was placed at the very first strike price above the  11am hourly candlestick. Since the market was trading in that area, I was able to place an at-the-money (ATM) SELL trade at 2106.3, risking $50 to make $50. But since I knew the odds were heavily in my favor for the 12pm hourly candlestick to be bearish, I also took an in-the-money (ITM) SELL trade at 2107.8, risking $71.75 per contract to make $28.25.

Both of my trades were briefly threatened by an uptick in the market, before it reversed and dove until the 1pm expiration of the trade. The market settled at 2104.50, comfortably below my SELL strike prices at 2106.3 and 2107.8 for a full profit on both propositions.

Conclusion:

This is a new trading observation, and it needs further back-testing. I have only looked at 40 trading days, but need to go back further to see if this pattern holds up to the test of time.

Here's how the Pastrami trade played out over 20 consecutive trading days in July, assuming you placed a trade at the close of the 11am hourly candlestick, risking $70 per contract:
  • Pattern Success: The 12pm hourly candlestick did not violate the trade strike price in 19 out of 20 trades. That's a 95% success rate for the actual pattern.
  • Trades Filled and Won at  $70 Risk: 9 trades won and settled ITM for a full $30 profit per contract. That's a $270 gain.
  • Trades Filled and Lost at  $70 Risk: 1 trade lost and settled OTM for a maximum $70 loss.
  • No-Fills: 10 trades resulted in no-fills at $70 risk. The market had moved too far in the 11am hour to get my preferred $70 risk/reward at 12pm. If you waited for the candle to close you wouldn't have had a trade. No harm, no foul.
  • End Result: The traded would have yielded a net profit of $200, if you took a full loss on the 1 losing trade, and let your 9 winners ride until expiration.Your exchange fees would have totaled $17.10 for a net profit of $182.90. If you traded with a $1,000 opening account balance, this strategy alone would have yielded an 18.9 percent return for July.
And that will buy a few Pastrami sandwiches.  I will continue to record daily results on this strategy for the months going forward, and will post the results. I will also be looking for OTM and Nadex Spread opportunities with this trade.



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The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.

Friday, July 24, 2015

Trading the GBP/USD "London Breakout" Strategy with Nadex Spreads


If you are an early riser or can't trade during normal market hours, here's a trade that can make some very nice money for you as you head out the door to work. You might even find it worth setting your alarm clock for this one.

Every weekday morning at 3:00am EDT, The London Financial Markets open. The London Exchange is the busiest financial exchange, and a huge volume of transactions are processed when the market opens. 3am is also the final hour of the Tokyo exchange.

The sheer volume of transactions often results in a steep upward or downward spike in the GBP and its associated currency pairs. This is also compounded when Economic news is released out of the UK, usually at 4:30am.


Many trading strategies have been developed around the London Open, but Josh Martinez does a very nice job of explaining how to regularly capture 50 pips on the London Breakout Strategy. Full text of this highly consistent  Forex strategy can be found in Trading Outside Normal Hours, a free eBook from TradingPub.

I decided to use a modified version of Josh's methodology to trade the "London Breakout" strategy using Nadex Spreads. My profit target was 50 pips, which was achieved effortlessly.

Nadex Spreads resemble traditional Futures and Forex trades, with a few differences that I consider to be advantages:
  1. Your risk is defined. You know exactly what your maximum loss or gain is per trade.
  2. You cannot get stopped-out as long as your trade is active. If the market moves against you briefly, your trade is still alive, unless you decide to exit the trade.
  3. Your maximum risk is your margin. In many cases, your risk is substantially less than the margin your broker holds in reserve on Forex trades.
  4. No broker commissions, no middlemen. With Nadex, your orders are placed directly on the exchange, and there's a $.90 cent (per side) exchange fee charged per contract.
  5. You are not trading against your broker. As an exchange, Nadex matches your opinion on the direction with someone who has an opposing viewpoint. Nadex collects $.90 cent per side in exchange fees to facilitate the transaction.
Today's "London Breakout" Trade with Nadex Spreads
Example of a Nadex Spread being SOLD
How do Nadex Spreads Work?

Nadex spreads put a "box" around a trade. The floor and the ceiling of the box represent the maximum price range of the box. The left wall is the start of the trade, and the right wall is the expiration time for the trade.

To trade a Nadex spread, you simply follow these steps:
  1. Determine the direction you think the market will be going
  2. Select a strike price of your choosing
  3. If  you SELL a spread, the number of pips between your strike price and the CEILING of the box will be your maximum risk. The number of pips between your strike price and the FLOOR is your maximum profit.
  4. If  you BUY a spread, the number of pips between your strike price and the FLOOR of the box will be your maximum risk. The number of pips between your strike price and the CEILING is your maximum profit.
I haven't done much with Nadex spreads in the past, but lately I have been devoting considerable practice time trading them. With each trade, I am refining my technique, and I like what I'm seeing.

Today I chose a 800 pip spread with a daily expiration.  I traded 1 contract, with a maximum risk of $410 to make a maximum of $390. Each pip is worth $1.00 and my profit target was 50 pips, just the way Josh teaches his method for trading the London Breakout Strategy.

The "London Breakout" Strategy in a Nutshell

  • The Low or High of the day will be revealed between 2am-5am EDT the great majority of the time, when the London Market opens.
  • The corresponding High or Low will be established between 8am-2pm after the opening of the New York financial markets.
Think of it like a see-saw. If the High of the day is established between 2am-5am, then the rest of the day will be on a downtrend. If the Low of the day is established between 2am-5am, then the rest of the day will be on an uptrend. If you can spot the low or high of the day during the morning session, then you have an opportunity to pick up 50 pips or more quite frequently.

I am grossly oversimplifying this trading strategy. To get full details of the "London Breakout" strategy, it is well worth your while to download Trading Outside Normal Hours. Also take time to watch the video I have attached below which fully explains the strategy.


 Here's how the "London Breakout" Strategy trade played out on July 23, 2015:

15 Minute Nadex Chart of the GBP/USD. Click on Chart to Enlarge.

From 2am-4pm, the GBP/USD was grinding upward, but there was no way I was going to make a decision about placing a trade until the UK Retail Economic Reports were released at 4:30 am. Here were the results of the news:

Courtesy of Investing.com

As you can see from the chart above, the market plummeted within 2 minutes of this bearish news. I did not have the reaction time or dexterity to catch that free fall. But I was convinced that that the high of the day had been established and the rest of the day would be downhill. The market tried to retrace upward a little bit for about an hour.

I made the decision to SELL at 6:54 EDT, when the market started to look like it was going to keep going down. The market moved sideways going into the 8am New York open. When the New York markets opened. The downward momentum created at 4:30 spilled over into the New York session picking up 50 pips in 45 minutes on a free fall. I decided not to exit the trade just then, to see if the market had further room to fall. The market retraced briefly, then started falling again. This time I exited for a 51 pip profit.  The trade picked up $51 per contract, less $1.80 in exchange fees.

If I had equalized this trade with a Standard Lot Forex trade, I would have traded 10 contracts, nd each pip  would have been worth $10, for a $510 profit, less $18.00 in exchange fees.


Conclusion

I have a lot of work to do with Nadex Spreads, but they have definitely gotten my attention. I know it's a very common trading adage to cut your losses short and let your winners run. Today, I stubbornly kept to a predetermined trading plan and picked up 51 pips. I could have picked up 70 pips, but a plan is a plan.


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Video: Trading the GBP/USD
"London Breakout" Strategy

By Josh Martinez, MTI







The Purpose of this Blog


The Inquisitive Trader will be used  to share my experiences as an investor getting back into trading the markets. In June 2014 I joined the staff at TradingPub, and I am responsible for helping to book speakers for free webinars. Each week, I am exposed to a wealth of information from leading industry experts who teach how to trade the financial markets. When I come across interesting trading strategies, I will summarize my thoughts and share a link to the archived webinar. As I develop my own trading plan, I will also share some of my personal successes and failures. Responsible comments are welcome, but to avoid flaming posts and spam, I will be moderating all comments. I hope you find this blog useful, and wish you the very best on your journey trading the markets.

Disclaimer

The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.