Sunday, December 14, 2014

Applying the 4 Stages of Learning to Trading Nadex Binary Options


Learning any new skill requires a receptive mind, education & training, practice and consistent application before mastery is achieved. In the 1970s, Gordon Training International introduced “The Four Stages for Learning Any New Skill”. While this model works extremely well for learning any new skill, whether it’s cooking or automotive repair, it works equally well for mastering Nadex.

Stage 1: Unconscious Incompetence – “You don’t know what you don’t know”

You just saw an ad on Bloomberg TV or an article about Nadex, and you've never heard of it before. Maybe you have a friend who is trading successfully on the Nadex platform, and let you know about it. You have a brief internal debate if trading Nadex is useful or not for you. After a little bit of research, you understand that Nadex deals with simple “yes or no” propositions. Will gold futures settle above or below 1190.0 when the markets close at 1:30pm EST? How does Nadex really work? After a little more research, you download a free 2-week demo of Nadex and decide to see what it’s all about. You are now ready to move on to the next stage of learning.

Here’s an example: You have learned that you can’t get “stopped-out” as long as trade is active in Nadex. You have also learned that your risk and reward are capped, so a trade can never run away from you. You’re intrigued and you look at today’s volatile, choppy markets:

Let's take a look at the hourly chart for the DAX futures market on Thursday, December 4, 2014. A veteran trading educator once observed that the 7:00am EST hourly candlestick is a pivotal point in that market most of the time, and usually sets the tone for the next hour or so. If you follow this strategy, you would watch the 7am hourly bar and confirm that it was bearish. Then you would sell the market, set your stop/loss and take profit targets.

Everything was going according to plan until 8:30, when news from the ECB Press Conference was released, along with remarks from FOMC member Mester and a slightly bearish Continuing Jobless Claims report. The Dax futures market shot straight up like a rocket, stopping out anyone holding a short position. Then it hesitated for a second and went into a nose-dive, taking out anyone still in the market with a long position. Within 5 minutes the DAX futures market traveled between a high of 10095 and a low of 9874 for a 221 point swing. Very few people in the market at that time survived unless they had incredible dexterity. The obvious lesson in this example is that it can be extremely dangerous trading in to news events.

You learn that if you made the same trade in Nadex, using the 7am-9am EST trading period, your trade would have been protected from the 8:30am market spike that took out a great number of futures traders. Remember, you can't get stopped-out trading Nadex before a defined expiration period. The trade would have settled safely in the money at 9:00am. In this example, your trade would have also been protected from a runaway market because there is a defined profit and loss, and you know exactly what your maximum risk is before you trade.

Stage 2: Conscious Incompetence – “You now know about something previously unknown to you”

You are exploring your Nadex demo account, and you starting to make some trades. Although the platform is easy to use, you quickly see a few successful trades, and you also make a few mistakes. You realize that in order to trade consistently, you need to learn some high-probability trading strategies, combined with an understanding of risk-to-reward and disciplined money management. You analyze your losing trades, and discover where mistakes were made. You also discover patterns behind successful trades. After doing some further research, you sit in on a few webinars and identify some strategies from experienced Nadex traders with a documented history of success. Armed with a couple of strategies, you decide to fund a live Nadex account with as little as $100, and you are ready for the next stage of learning.


Stage 3: Conscious Competence – “You know what to do, but practice makes perfect”

Armed with a few high-probability strategies you discovered, you are now practicing with them daily in demo mode, and implementing them with your live account if the optimum setup presents itself. You are checking the economic calendars, studying the markets you follow, and applying technical analysis to make an educated decision about those markets. You are developing patience, and looking for the right setups to reveal themselves. You keep a log of every trade you make, and you analyze them daily. But all of this takes conscious effort and concentration. After repeated testing of high-probability strategies in your demo account, you start to feel very comfortable with your consistency and your results. And that’s when you move on to the next stage of learning.



In this example, you have developed a set of rules for trading the 7am DAX strategy in Nadex. You watch the 7am EST candlestick develop. Is it developing bullish or bearish? Once the bullish direction is confirmed, you BUY the Germany 30 market (DAX) at the first strike price BELOW the 7am opening candlestick price. The order fills and the market travels safely for a profit at expiration. You’ve tested this strategy over 40 times in demo, and you have learned how to master the deployment of this strategy. You also have meaningful statistics on successes vs. failures with this strategy. You can almost make the trade in your sleep.


Stage 4: Unconscious Competence – “You know what you know, and it’s now habitual”

You have practiced your strategies so much, that they have now become reflexive. You instinctively check the economic calendar, plot your indicators, do your technical analysis and make informed decisions in a split-second. It seems like you don’t even have to think about it. Experience tells you when to pull the trigger on a trade, exercise caution or when not to trade. You have developed a set of trading rules that are ingrained in your personality, and you don’t deviate from your trading plan. Stage 4 is where you want to be, because you can trade with a relaxed and confident mindset. You know that you have the edge, and the probabilities are firmly on your side. You are also disciplined, and have become a master at managing risk/reward and the money you make available for trading. Losses don’t bother you, because you know the probabilities are firmly on your side.

Once you understand where you are in the process of learning of a new skill, then learning becomes fun, and you become a sponge for more information. If you come across a new strategy for trading Nadex binary options or spreads, it is important to recognize that you are back in stage 1 of learning. If it’s a promising strategy, you will drive yourself to get to stage 4, where the new strategy becomes instinctive.

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.