The Inquisitive Trader: 2015

Thursday, August 13, 2015

A Low Risk, High-Reward Twist on the DAX "Strudel" Strategy with Nadex

Every morning, I trade the the 7am-9am Germany 30 (DAX) strategy with Nadex binary options. I call it the "Strudel" strategy, because it's a delicious breakfast trade. This strategy was based on the observation from Tom Busby, a veteran Futures trader who observed that the 7am EDT hourly candlestick of the Germany 30 (DAX) Index is a pivot point that determines the direction of that market for the following hour a great majority of the time.

The rules for the strategy are remarkably simple:

Select the 7am-9am EST Nadex time period for the Germany 30 (DAX) Index.
Once you are 100% convinced that the 7am EDT hourly candlestick will be BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of hourly candlestick.
Once you are 100% convinced that the 7am EDT hourly candlestick will BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of hourly candlestick.
The safest way to execute this strategy is to wait for the 7am hourly candlestick to completely close before you make a decision to BUY or SELL. Markets can get whippy, and one of the most common mistakes made with this strategy is to pull the trigger too early on the trade. Patience is key.

This strategy has been remarkably consistent. Over the past 60+ trading days, this pattern has repeated itself about 90 percent of the time. Just be patient and watch the 7am hourly candlestick develop. Once it's confirmed bullish, then buy. If it's confirmed bearish, then sell. Again, if you want to be "super-safe", don't make a trading decision until 8am, after the 7am hourly candlestick has closed.
Sometimes the 7am hourly candlestick develops very bullish or bearish in a hurry. When that happens, it may be very difficult to get a trade that satisfies your risk/reward criteria. Today was an example of such a trade.

5 Minute Nadex Chart on the Germany 30 (DAX) Index. Click on Chart to Enlarge.

Looking at the chart above, the market had been on an extended downtrend, opening at 11422 at 7:00am EDT. The market ground it's way upward for the first 15 minutes. Then it reversed and started to dive. The 7am hourly candlestick closed at 11405 - BEARISH.

Under the trading rules of this strategy, that would trigger a SELL from 11429, the first Nadex strike price ABOVE the 7am hourly candlestick. But at 8:00am the market was 25 ticks away from the strike price and continuing to move South. To get an order filled, it would have required me to risk $85-$90 per contract. A little bit too expensive for me. The MACD was starting to cross over from bullish to bearish, and I felt the downtrend would continue, so I placed two orders:

The first order was a working order that satisfied the rules of the trade. I sold from the first strike price ABOVE the 7am hourly closed candle, which was 11429. The market looked like it was going to be on a continuation down trend, so I placed another live order to SELL at 11369. For this order to settle in-the-money (ITM) for full profit, the market would need to drop another 36 ticks.

The beauty of out-of-the-money (OTM) trades is that your capital risked is far less than your potential reward. But OTM trades also become valuable when the market starts to move toward your strike price. I had a $30 profit target per contract with my pending order. I also decided on a $30 profit target for my live order.

It looked like the market wasn't going to cooperate with my OTM trade, but I only had $8 risked. Then at 8:55, just 5 minutes before the trade was due to expire, the market dove. My trade was now worth $31 in profit, so I took profit and closed out the trade. Mission accomplished. I hit my profit target.

The market expired below 11369. If I had decided not to exit the trade, I could have picked up $92 instead of $31. But that wasn't a certainty. As sharply as the market dropped, it could have easily retraced and settled above 11369 at the 9:00am expiration.

The first trade never filled, so there was no trade on my SELL at 11429 with a $30 profit target. Instead I managed to pick up the $30 profit risking only $8 instead of $70. It was a slightly different twist on my normal strategy, but yielded the same results.

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Video: Breakfast, Lunch & Dinner Trades with Nadex
By Cam White, TradingPub

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.

Monday, August 10, 2015

A Lunchtime "Pastrami" Trade on the S&P 500 with Nadex Binary Options

When I think about lunch time on Wall Street, I think of a Pastrami on Rye at a New York Deli. With that in mind, I recently came across a lunch time trade that looks like it could be quite tasty. In honor of lunch time in New York, I am calling this trade the "Pastrami".

A few weeks ago, I was doing some monthly analysis on some of my other favorite trading strategies, when I noticed a very consistent pattern that revealed itself on the S&P 500 Futures market.

Looking at the hourly charts, something jumped out at me. It appeared that the 11:00am EDT hourly candlestick controlled the 12:00pm EDT hourly candlestick with a high degree of frequency.

Here's what I saw:

Hourly Chart of S&P 500 Futures (Investing.com) Click on Chart to Enlarge.

Notice the 11am hourly candlesticks above. Can you see that the following 12pm candlestick never challenges the opening price of the 11am candlestick? In fact, the 12pm candlestick tends to continue in the same direction that was established by the 11am candlestick. I back-tested the hourly charts on Investing.com charts for 40 trading days, and the same pattern repeated itself for 36 out of 40 days. That's a 90% probability of a pattern repeating itself.

The same phenomenon occurs with the 7am-9am German "Strudel" strategy that I have written about extensively. Complete rules for the "Strudel" strategy are included in the free eBook from TradingPub, entitled "Trading Made Simple: Strategies that Risk $100 or Less".

The rules for this new "Pastrami" strategy are very simple to execute:

Select the 11am-1pm EST Nadex time period for the US 500 Index on the Nadex platform.
Once you are 100% convinced that the 11:00am EDT hourly candlestick is BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of the 11am hourly candlestick.
Once you are 100% convinced that the hourly candlestick is BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of the 11am hourly candlestick.

This is a very simple strategy that looks like it can be fairly consistent. Just be patient and watch the 11am hourly candlestick develop. Once it's confirmed bullish, then buy. If it's confirmed bearish, then sell. If you want to be "super-safe", don't make a trading decision until 12pm, after the 11am hourly candlestick has completely closed.

I have taken several trades with this strategy in demo, and I like what I'm seeing thus far. I don't always get filled with my risk/reward rules, but it's rare for a trade to threaten me once I'm in the market. I know that I have a recent 90 percent historical probability of my trade expiring in the money for full profit. That also means I have a 10 percent probability of losing the trade. As long as I risk $80 or less on each trade (my preference is $70 risk), I know that it's very hard to lose money.

Let's take a look at a recent "Pastrami" Trade (Friday, July 31 2015) taken in my Demo Account:

Hourly Nadex Chart on the US 500 Index (Click on Chart to Enlarge)

After three very choppy hours of trading, the 11am hourly candlestick was a battle between the bulls and the bears. Notice the wicks above and below the 11am candlestick. Ultimately, the bears won by a small margin.

Knowing that I had a 90% probability of this trade working out in my favor if I SOLD from ABOVE the opening price of the 11am candlestick, I placed the two trades at 12:13pm, after the close of the first hour of trading. I decided to wait on confirmation of the direction of the 12:00 hourly candlestick, since the 11am hourly candlestick was almost a Doji.

The first trade was placed at the very first strike price above the 11am hourly candlestick. Since the market was trading in that area, I was able to place an at-the-money (ATM) SELL trade at 2106.3, risking $50 to make $50. But since I knew the odds were heavily in my favor for the 12pm hourly candlestick to be bearish, I also took an in-the-money (ITM) SELL trade at 2107.8, risking $71.75 per contract to make $28.25.

Both of my trades were briefly threatened by an uptick in the market, before it reversed and dove until the 1pm expiration of the trade. The market settled at 2104.50, comfortably below my SELL strike prices at 2106.3 and 2107.8 for a full profit on both propositions.

Conclusion:

This is a new trading observation, and it needs further back-testing. I have only looked at 40 trading days, but need to go back further to see if this pattern holds up to the test of time.

Here's how the Pastrami trade played out over 20 consecutive trading days in July, assuming you placed a trade at the close of the 11am hourly candlestick, risking $70 per contract:

Pattern Success: The 12pm hourly candlestick did not violate the trade strike price in 19 out of 20 trades. That's a 95% success rate for the actual pattern.
Trades Filled and Won at $70 Risk: 9 trades won and settled ITM for a full $30 profit per contract. That's a $270 gain.
Trades Filled and Lost at $70 Risk: 1 trade lost and settled OTM for a maximum $70 loss.
No-Fills: 10 trades resulted in no-fills at $70 risk. The market had moved too far in the 11am hour to get my preferred $70 risk/reward at 12pm. If you waited for the candle to close you wouldn't have had a trade. No harm, no foul.
End Result: The traded would have yielded a net profit of $200, if you took a full loss on the 1 losing trade, and let your 9 winners ride until expiration.Your exchange fees would have totaled $17.10 for a net profit of $182.90. If you traded with a $1,000 opening account balance, this strategy alone would have yielded an 18.9 percent return for July.

And that will buy a few Pastrami sandwiches. I will continue to record daily results on this strategy for the months going forward, and will post the results. I will also be looking for OTM and Nadex Spread opportunities with this trade.

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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:

Your risk is defined. You know exactly what your maximum loss or gain is per trade.
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.
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.
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.
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:

Determine the direction you think the market will be going
Select a strike price of your choosing
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.
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

Disclaimer

Tuesday, July 21, 2015

Trading the DAX "Strudel" Strategy with Nadex Spreads

Every morning, I trade the the 7am-9am Germany 30 (DAX) strategy with Nadex binary options. I call it the "Strudel" strategy, because it's a delicious breakfast trade. This strategy was based on the observation from Tom Busby, a veteran Futures trader who observed that the 7am EST hourly candlestick of the Germany 30 (DAX) Index is a pivot point that determines the direction of that market for the following hour a great majority of the time.

The rules for the strategy are remarkably simple:

Select the 7am-9am EST Nadex time period for the Germany 30 (DAX) Index.
If the 7am EST hourly candlestick is BULLISH, then BUY a Nadex Binary Options contract(s) at the first Nadex strike price available BELOW the opening price of hourly candlestick.
If the 7am EST hourly candlestick is BEARISH, then SELL a Nadex Binary Options conrtact(s) at the first Nadex strike price available ABOVE the opening price of hourly candlestick.

I have traded this strategy exclusively with Nadex Binary Options since August 2014. But recently, I have taken a closer look at trading this strategy with Nadex Spreads.

Nadex Spreads resemble traditional Futures and Forex trades, with a few differences that I consider to be advantages:

Your risk is defined. You know exactly what your maximum loss or gain is per trade.
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.
Your maximum risk is your margin. If you want to equalize a Nadex trade with a Standard Lot Forex contract, you don't have to put up thousands to cover the margin requirements. In today's trade, 10 Nadex contracts were sold, making each pip worth $10, just like Forex. Instead of putting up over $2,000 in margin requirement, only $700 was withheld to make a maximum of $1,300.
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.

Today's "Strudel" Trade with Nadex Spreads

4 Hour Nadex Chart. Click on Chart to Enlarge

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:

Determine the direction you think the market will be going
Select a strike price of your choosing
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.
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 after today's trade, I plan to devote more time to practicing with them.

I chose a 200 point spread and wanted to trade 10 contracts to get the same leverage as a Standard Lot Forex trade, where 1 point = $10. The market was on a downtrend, so I decided to SELL during the 7am EDT Hour, consistent with the strategy I usually use when I trade the "Strudel" Strategy with Binary Options. If the 7am hourly candlestick is developing Bullish, then BUY. If it is developing Bearish, then SELL.

When I entered the trade to SELL after Bearish confirmation, the Nadex Spread I selected offered $700 maximum risk, for $1,300 maximum profit. Before placing the trade, I was prepared to take a $150 loss if the trade moved against me, and I had a $200 profit target. Here's how the trade played out:

5 minute Nadex Chart. Click on Chart to Enlarge.

The trade was placed at 7:40am EDT, and the market started grinding downward. Within 30 minutes, I had picked up about 15 pips, or $150. I was well on my way to my $200 profit goal. At 8:30, the market moved from a 20 pip gain back to a 15 pip gain. Was this a temporary retracement, or was it a reversal? At 8:40, I exited the trade for a 22 pip gain, or $220.

That's the good news. I had a plan and I stuck to it. I reached my profit goal and exited the trade.

The bad news is the market kept diving after I exited with a vengeance, all the way through the floor of the spread box. If I would have let the trade run, I could have exited at 10:50am for the maximum $1,300 reward. I left $1,100 on the table. And that will buy a lot of Strudels.

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 never gave the trade the opportunity to run. I'm not beating myself up about this, but it will be interesting to see how I adapt my trading plan to take advantage of these opportunities in the future.

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Video: Breakfast, Lunch & Dinner Trades with Nadex
By Cam White, TradingPub

The Purpose of this Blog

Disclaimer

Friday, July 17, 2015

Two Consecutive Days of the GBP/USD "Afternoon Delight" Strategy with Nadex

This trade comes courtesy of Krystal Comber, CEO of SlickTrade. The full text of this strategy, can be found in TradingPub's new free eBook
"Trading Made Simple - Strategies that Risk Less than $100."

The "Afternoon Delight" trade has been extensively tested on the GBP/USD currency pair, and it is very consistent and super simple to execute if a setup is in play.

The trade requires two components:

15 minute charts on the GBP/USD
MACD

If you see a crossover after noon, a trade setup is in play. it really doesn't get much simpler. For full details on this strategy, make sure to watch Krystal's short video at the bottom of this blog.

Here are the steps you need to take to execute the GBP/USD "Afternoon Delight" trade.

Select the 7pm daily on the Nadex platform
Look to see the overall trend direction from the start of the New York Session
If it was bearish (downward movement) then you will be looking to Buy after you receive confirmation of trend direction change
If the trend was bullish (upward movement) then you will be looking to Sell after you receive confirmation of trend direction change
If there is any news on GBP or USD during the hours of 12pm – 7:15pm (EST) – avoid trading the strategy that day
Once the cross occurs on the MACD, wait for full formation of the current 15 minute candle
If the trend direction was bearish, then you would purchase a Buy at the lowest point of the body of the candle where the cross occurred
If the trend direction was bullish, then you would purchase a Sell at the highest point of the body of the candle where the cross occurred
I normally place a market order and a working order on this strategy. Many times the strike gets tested for the next few hours, so setting a working order in addition to the market order can give you additional profit possibilities overall.
That’s it!

"Afternoon Delight" Trade - Thursday, July 16 2015

15 Minute Nadex Chart. Click on Chart to Enlarge

On this 15-minute Nadex chart, the MACD crossover occurred at 3:15pm EDT. The market then moved below the T-Line (8EMA, shown in purple) and started to grind its way down. The decision was made to SELL the GBP/USD from 1.5620, which was a position of safety.

Since the probabilities were high that this trade would be successful, I risked $72.72 to make $27.25. The trade was never threatened. I've been trading this strategy for several months, and I have been rarely disappointed, so I wasn't too worried.

It is important to note that if the market suddenly decided to reverse and attack my position, it would be very wise to bail out and cut losses. But that wasn't the case yesterday. As it usually does, the market just continued to drift downward, and this trade was never threatened.

Trade Results:

Win: SELL at >1.5620 - 1 contract x $27.25 profit, less $1.80 in exchange fees = $25.45

"Afternoon Delight" Trade - Friday, July 17, 2015

15 Minute Nadex Chart. Click on Chart to Enlarge.

The rules for this strategy are slightly modified on Friday, since Nadex does not offer a 7pm expiration on Friday. Today, I was looking for a MACD crossover sometime after 11pm. The crossover occured at 1:30pm and I pulled the trigger on a trade risking a maximum of $60 to make a maximum of $40 dollars. The trade was briefly threatened, but it settled safely in the money for a full profit.

Conclusion:

This strategy is very consistent. To backtest it, just load the 15-minute charts and the MACD. Look at the time period after 12noon and look for a MACD crossover. If it happens, look at where the GBP/USD price is at 7pm. Test this strategy in demo before you attempt trading it live to see if it suits your trading style.

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Click Below to View Krystal Comber's "Afternoon Delight" Strategy