Using Nadex to Make Trades You Can Sleep On

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A Simple Strategy for Trading the GBP/USD with Nadex Binary Options
By Cam White, TradingPub

If you are new to trading the markets, or if your schedule doesn’t permit you to trade when the markets open in New York, there is a strategy for trading the GBP/USD currency pair using Nadex binary options that can be very effective. This strategy allows you to quickly make an observation overnight, set an entry point, execute a trade with confidence and go back to sleep.

Every trading day, as the Forex currency markets open, there is a one hour overlap between the opening of the London session and the close of the Tokyo session. It occurs between 3:00 am and 4:00am EDT. It is estimated that over 40 percent of Forex trades are processed through these two trading hubs, so there can be high volume and volatility within that one hour time window. As the London market opens, large volumes of transactions are processed, which often produces a corresponding spike in activity  between the Great Britain Pound (GBP) and its related currency pairs, including the GBP/USD. This spike can be bullish or bearish, but it is usually very obvious, has momentum and reveals itself no later than 5am EDT.

One popular trading strategy observes that the high or low of the GBP/USD session will be established between 2:00am-5:00am EDT. The corresponding low or high will occur between 8:00am-2:00pm EDT after the opening of the New York market. If you are confident that the daily high or low of a trading session is setting up at the open of the London trading day, then determining the direction of the market for the rest of the day can be a simple binary "up or down" decision.

Forex Market Hours. All Times are EDT (New York)

This strategy, known to some Forex traders as the “London Open Breakout Strategy”, has been successfully used and backtested for years. Forex traders use this information to find the right entry point, and to set their profit and stop/loss targets. With Nadex binary options, if you see a strong directional move in the GBP/USD with obvious momentum, then you are making a simple “upward or downward” decision about the direction of the market, choosing an entry point, and setting your contract expiration to 3:00PM EDT that day. When you are “right”, each contract settles at $100 at expiration. If you are “wrong”, the contract settles at $0 at expiration. If the trade is working in your favor, but starts to retrace and threaten you, you have the option to settle your contract early to take a partial profit, break even or minimize losses.

Nadex GBP/USD Chart for 7/11/2014

In the example above, the GBP/USD pair chopped sideways when the market opened at 2:00am EDT. At 3:00 am, the London market opened, and started chopping downward before spiking to a daily high at 1.71500 at 4:20am. Then the  GBP/USD started to plummet. It looked like the probable high for the day had been established. The next task was to find a trade that had an optimum risk/reward ratio. A contract was available to SELL the GBP/USD pair for $42 per contract, putting $58 per contract at risk. Three contracts were sold, and here were the trade confirmation details:

Trade Details:

Contract: GBP/USD >1.7140 (3PM)

Expiration: Fri Jul 11 15:00:00 EDT 2014

Direction: SELL

Quantity: 3

Price: 42.00

Note: Exchange trading and expiration fees have been excluded

This contract was based on the proposition that the GBP/USD would be greater than 1.7140 by 3:00pm EDT. If you buy that contract, then you are assuming the market will close above that proposition , and therefore be “true”. But the market was falling, so the decision was made to sell the contract, assuming that the proposition would be “false”.

As the chart illustrates, by the time the New York market opened at 8:00am EDT, the GBP/USD pairing was well on its way to a session low at 9:20am, and the contract was never threatened, winding up $126.00 in the money, less $5.40 in trading and expiration fees.

When you backtest this strategy, you will notice that it is relatively easy to identify the session high or low within the first three hours of the trading day (2:00-5:00am EDT). The corresponding low or high will also be revealed after 8:00am EDT. If the market chops sideways in the morning and you can’t find clear market direction or momentum, then you don’t want to use this strategy for that day.

Guidelines for deploying this trading strategy:

1. Practice this strategy in demo mode before you go live. You can download a free 14 day trial from Nadex. Click Here for a free trial. If you already have a Nadex account, practice this strategy in demo first. Log 30-40 practice trades to make sure you are comfortable before going live with the strategy.
2. Make sure you are awake and alert at 3:00am EDT.
3. Review the past few sessions of the GBP/USD. Is the market trending up or down?
4. Record the previous session close, and the average daily range.
5. Check the economic calendar for any reports that could affect the GBP/USD. Research any news being released on this currency pairing.
6. Find the probable session high or low between 2am-5pm. It will usually reveal itself shortly between 3:00am-4:30am EDT. If the direction of the GBP/USD isn’t obvious to you, then you are assuming unnecessary risk, and should pass on this strategy for the day.
7. Try to find a Nadex proposition that yields between 40-60% in profit for an optimum risk/reward ratio. Generally speaking, the earlier you act once you’ve identified your entry point, the better your profit will be.
8. Set your contract expiration for 3:00pm EDT. If you select an earlier expiration target, you may be exposed to additional risk from intraday retracements.
9. If you notice that the trade is starting to turn against you during the trading session, you may have the opportunity to settle your contract before expiration, and protect some of your profits or minimize losses.
10. Only risk money that you are completely comfortable losing. If you’re not sure what that is, it should be equal to the amount of money you can confidently risk, and go straight back to bed without tossing and turning.

Nadex is a federally regulated exchange (CFTC) that is only available to legal residents of the United States of America.

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.