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.

10 comments:

  1. I'm trying to make money every single night during the London session. I read that the GBP/JPY moves 150-290 pips on average every day. Shouldn't we be able to do a straddle (Nadex) on this pair every day before 3am & make $$$? If we buy and sell a spread with a common floor/ceiling, and the total risk of the two combined is $24, the market would only have to move 37 pips above or below the floor/ceiling to make $10 after commissions. This should happen pretty much every night. Am I missing something here??? If we do this with 10 contracts, we would make $100 every night.

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