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.

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