Today's "Strudel" Strategy - The Exception to the Rule Comes Into Play

Almost every rule has its exceptions, and yesterday the exception came into play with the Nadex 7am-9am Germany 30 (DAX) strategy. Since that's a pretty lengthy description for a strategy, I'm now shortening it to the "Strudel" strategy.

Every morning, I trade the the 7am-9am Germany 30 (DAX) strategy with Nadex binary options. This strategy was based on the observation from a veteran trader who remarked 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 next hour or so.

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 at the first Nadex strike price available BELOW the opening price of hourly candlestick.
• If the 7am EST hourly candlestick is BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of hourly candlestick.

This is a very simple strategy that is remarkably consistent. Just be patient and watch the 7am 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 8am, after the 7am hourly candlestick has closed.

But there is one notable exception to this strategy: Never try to catch a falling knife! And today that exception to the rule prevailed. First, let's take a look at the hourly chart for the Germany 30 (DAX) Index:

Click on Hourly Chart to Enlarge

Starting at 4am, the hourly candlesticks were on a very steep down trend. The 7am candlestick, while bullish, looked more like a retracement to the T-Line (8 EMA). Under the normal rules of this strategy, a bullish 7am candlestick would have triggered a BUY. But given the steep hourly decline of the market, caution was warranted.

Now let's take a look at the 15 minute chart:

Click on 15-Minute Chart to Enlarge

Once again, the 7am 15-minute candlestick was bearish, gapping below the T-Line. A retracement was imminent, which ultimately occurred at 7:30.


Here's how the trade played out (Tuesday, March 31, 2015):

7:00am - The 7am hourly candlestick opened at 12017.533, and continued its downtrend for 25 minutes. Convinced that the market was going to continue on its bearish path, a pending/working order was placed to SELL from the first strike price available ABOVE the 7am opening price:

Trade Details: 
Contract: Germany 30 (Jun) >12030 (9AM) 
Expiration: Tue Mar 31 09:00:00 EDT 2015 
Direction: SELL 
Quantity: 1 
Price: 50.00

This was not a market order. For this order to fill, the market would have to grind back upward for a fill. Sure enough the market reversed and ground its way upward, filling my order at 7:45. I was now in the market, risking $50 to make $50. For this order to expire at 9am successfully, it would have to settle below 12030.

8:00am - The 7am am hourly candlestick closed BULLISH at 12025.033. Under normal circumstances, this would trigger a BUY at 12010, the nearest strike price below the 7am opening price.

This made me uncomfortable. The steep downtrend in the market, coupled with a bullish 7am hourly candle meant that the traditional rules of this strategy could well be violated. To further my discomfort, there was an FOMC speaker due to talk at 8:50. I hate trading into news. The market ground downward slightly, and offered me a $15 profit. I took it and exited the trade. Better to be safe than sorry.  As soon as I exited the trade, the market moved downward sharply, expiring in the money at  12005.667.

The exception to the rule won in this trade. I would have stayed in the trade if it hadn't been for the looming FOMC statement. Instead of taking a full $50 profit, I took a $15 profit.

If I had followed this strategy to the letter and BOUGHT the market off the bullish 7am hourly candlestick, then I would have bought the market at the 12010 strike price, risking $50 and I would have lost the trade.

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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.