Trading NADEX Spreads

[Predictor 11]

Regards, I know a lot of people don't have the money to trade the ES futures. I have 2 of the top ranked > 6 months old strategies at C2 and I still didn't feel quite up to trading the full contracts. I wanted to share my experience trading at NADEX. I don't have any affiliation with them. But, I think not many people know about them and want make others aware of them! I only found them because I was looking for CFD's which aren't available to us US guys.

 

Anyway, NADEX offers bull spreads based on the futures and forex market (i.e ES, CL, YM, etc). These are limited risk/reward spreads and are small as $1 tick. The SP500 bull spread is based on the ES and has $10 to 1 ES point equivalent.

 

I wrote 2 writeups on them here:

 

http://themarketpredictor.com/Details/2011/2/26/Nadex,%20Emini%20Alternative

 

http://themarketpredictor.com/Details/2011/3/1/NADEX%20Binaries,%20Attractive%20Solution

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Brief benefits:

* Great leverage and granularity of contracts

* Wide range of markets (Forex, Index, Commodities)

* No PDT rules

* Limited risk/reward

 

Detriments:

* Not as efficient as futures market (paying outside best bid/best ask)

* Time limited contracts. This is my biggest issue to date.

* Tick size to commissions is high

* Leverage can work both for and against you

 

 

 

I wanted to share also strategies I've found for successfully trading them. I've had my account since April and on a 3k model account (1k of capital) my net real money return at peak was $1500+, currently around $500.

 

General principles for trading the bull spreads

 

* It tends to pay to take on more risk then buy right at the floor/ceiling. I'm typically willing to make no more then 3 to 4 points of premium (market premium). General strategy is to first, look at the market price and see where it is trading. Look at the wide spread 800 points. Next, go to the narrow spreads and see find the spread that is priced most closely to market. Check the dollar risk/reward. Be sure to cap both point risk and dollar risk to avoid paying too much in premium. Capping point risk will help you avoid paying too much in premium if you make a mistake.

 

* Do not close the spread for a loss unless you know you are wrong. I've had spreads go to zero and then come back and break even or even make money. While stops are required in highly leveraged futures trading, when you don't use stops then you maximize your winning potential. I only close spread if I'm sure that I'm wrong and typically only at near break even.

 

* For the futures market, you typically have to execute outside the best bid/best ask. If you trade $30 per point then you are down $18 when entering and exiting a trade. If you hold until expiry then will not pay the spread (your expiry commissions however will not be capped at $7/turn). However, if the trade reverses you won't have time for it to recover either. I.e the spreads expire at end of day and this has proven my greatest challenge in trading them.

 

* Be sure to figure in your fees when trying to break even and choosing trading style. If you trade 3 contracts then you will be down around $18 in spread and $6 in fees when entering: you must make $24 to break even. In general, I do not recommend to "scalp" these because of that. They do work well for my style -- taking out trend moves. You can also take out a measured move with them, as well -- 3 to 4 points.

 

* Be sure to look at time expiry. In general, you want as much time as possible unless you have a specific reason not too.

 

* Prefer binaries when buying/selling extremes. The bull spreads will often not respond to the degree you'd hope for because the time premium is such a large part of price at extremes.

 

* Sometimes paying a slight bit in premium is not a bad idea. The premium will decay slowly over time and so even if you pay up then you won't lose that "instantly". Generally though, the market pays you to take more risk. Trying to find a risk/reward where you are only paying a slight bit in premium but have capped risk and can leverage to a greater extent.

 

* In general, do not buy spreads that out-of-the-money until/unless you are advanced and have strong reason.

 

Principles on binaries

 

* Prefer to buy binaries on price extremes

* Remember you give up a significant edge when trading binaries: the edge is around 8% with commission. Most technical based methods only have a 2% to 2.5% edge. Be sure you have a strong edge when trading the binary.

* Only sell a binary at a loss if you are sure the trade is dead and you are wrong. I've had binaries go to nearly worthless on me and then expire with full payout. However, if I'm wrong then I will close them out even if there is only $15 to save. When closing out a losing binary, try to pick a limit order that will get you best price and cost you least amount. I mean be willing to fight for it: you've probably lost most of the value by time you recognize you are wrong anyway.

* Prefer at-the-money or slightly out-of-the-money binaries.

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Also, I don't trade the Forex markets yet but they claim their Forex markets are often as good as the spot FX, i.e your bid/ask. So, whether you will have to pay outside the best bid/best ask depends on the market. It is always the case with the ES but the spreads are fairly constant and so I just factor that in.

 

I'm not stating it is easy. But, if you are trading the ES on simulator successfully and if your strategy isn't just scalping then I highly recommend you to start getting some real money experience.

 

You can open account for as little as $100. I'm trading with only 1k in the account right now but I'm willing to put in a lot more in the account if needed.

 

My recommended lot sizes for a 3k account:

 

Small

2 Contracts = $20 point. Use for widest spreads.

 

Standard

3 Contracts = $30 point.

 

Heavy

4 Contracts = $40 point. Only when most confident.

 

Max account risk:

I feel one needs to be able to take 12 losses in a row. This would be a max risk of around $250 per trade or 8% of account. You need to take into account probability of loss and the max loss. In futures market, my REALIZED risk per trade is often lower then trading spreads but my MAXIMUM risk is higher. Do not confuse theoretical risk/reward with PROBABLE risk/reward. In general, if you need to risk $350 to $500 on a trade then be prepared to do that with a tiny account. Even risking up to 20% of the account may be justified if you have a strong edge.

 

Take advantage:

Take advantage of the small size. I am probably capitalized enough where I could trade the ES on some days but may not take every trade. I have traded ES for years though but I could not trade the mini crude -- for example because I only started trading it. However at NADEX, I can trade crude with just a few hundred at risk. So, it is a good way to learn new markets too. I am taking only 1 new market at a time though.

 

It is crude for now but based on what I read then the 6E? Euro? will be likely next.

Edited July 11, 2011 by Predictor