Saturday, December 6, 2014

Protecting Yourself from Market Spikes with Nadex Binary Options



You're a disciplined trader. You have a good trading platform, great strategies and the proper mindset for trading the markets. You've done your research, and your indicators are all in agreement that a perfect setup is in play.  You place your trade, set your stop/loss and profit target.

The market moves in your expected direction, and everything is looking good. Then in an instant, the market reverses violently and stops you out for a loss. You don't have time to react. Your first reaction is pure shock, followed by disbelief and maybe anger. Someone was responsible for taking your perfectly good trade out of the market. Then the market reverses and moves in the direction you originally predicted, adding insult to injury.

This happens to traders every day trading stocks, futures, forex and other instruments. We live in a world where high frequency trades can unexpectedly come in to play. Economic news can also trigger violent market spikes.

Let's take a look at the hourly chart for the DAX  futures market on Thursday, December 4, 2014. Tom Busby, founder of Diversified Training Institute 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 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.

If you made the same trade with Nadex binary options your trade would have settled safely in the money for a profit at expiration without being stopped-out.




Click on Chart to Enlarge Image


Here's the same trade using the 7am-9am EST Nadex time frame. The 7:00am  EST candlestick opened at 10030.60. After confirming that the hourly direction of the DAX futures market was bearish, a trade was placed at 7:47am at the nearest strike price above the 7:00am opening price. Here are the trade details:

Trade Details
Contract: Germany 30 (Dec) >10046 (9AM) 
Expiration: Thu Dec 04 09:00:00 EST 2014 
Direction: SELL 
Quantity: 5 
Price: 30.00

Since this trade deep in the money, 5 contracts were sold, risking a maximum of $350 to make a maximum of $150. When the market spiked upward at 8:30, the trade wasn't threatened, because you can't get stopped-out trading with Nadex before the trade expiration period. After it retraced and moved downward, the trade was completely safe at expiration, yielding a $150 profit, less $9 in exchange fees for a $141 net profit.


If you are looking for a way to trade popular indices, commodities and forex pairs, Nadex provides an easy to use platform that can allow you to trade without fear of getting stopped out within a defined time period.



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.