Avoiding bad spread proximity during a trade in high volatility


#1

I’m a brand-new trader, just started trading live this week using the Izone Sharpshooter Beginner system. I caught some very nice trend trades this morning on NQ with the volatility around the Fed Chair’s speech. I tried to get into Nadex spreads near the bottom of the range but with low proximity, so that I had plenty of room for profit before hitting the spread boundary. Everything worked great, except that when the market took off the proximity of the spread didn’t keep up with the market even though I was in a wide spread and I never got close to the limit. It never caught up and when I got stopped out of the trade (based on the index) I left a bunch of money on the table because I had to close it out so far from the market.

Is there anything I can do to avoid that in the future, or is that just the nature of spreads in that kind of volatility? Would I have to trade futures directly to be able to track the market more closely?


#2

Depends on what you mean by wide spread. What market where you trading? How wide was the spread? Did you use the daily spread that starts at 6 pm et. Rarely are you going to get in at the bottom of a spread with low proximity during high volatility events.about the middle 70 % of the spread will have less proximity impact but as you reach the floor or ceilig of a spread the premium impact will be higher ecspecially during a high volatility event.


#3

I was trading NQ (this was the 10 AM event on Friday 8/26). I was using the daily spreads. I was limited by my cash available so I couldn’t get into the widest spreads, but I tried to get as low as possible in the spread I could buy while getting the best proximity possible because I knew it could move a lot and I wanted to have plenty of room to stay with the market. I’m going from my memory here, but the problem is that once the market took off I was seeing proximity numbers of 40-50 even for the spreads where it was right in the middle, and over 100 for others that were still ITS. Nothing seemed to be staying with the market during the move.

I went back and checked the specifics of my trades. The bad one was when it moved from 4794 to 4817 in about 3 minutes. I bought 4780.0-4810.0 @ 4797.1 @ 10:15:05. I sold at @ 4801.0 @ 10:23:55. I’m not on my trading computer so I’m just looking at the CME charts with 1 minute bars–the 10:23 ranges between 4811.5 and 4814, and the 10:24 ranges between 4810.75 and 4814.5. So it had crossed the ceiling of the spread, but I was still forced to sell $90 below the ceiling.

Is that just what spreads are going to do when it moves that fast? Is that the downside you accept for the upside of trading with spreads?

If I want to avoid that problem, what would I have to trade to stay closer to the market?


#4

It happened to me too. I was looking for a contract with low proximity the minimum was 24, I entered and had almost +$75 P/L on each contract, but with one small pull back like 1 point, it dropped alot like $35, that’s what I didn’t expect, I know that I shouldn’t look at P/L but I scared and exit and only from that big move got $26 on each contract. Nadex seems not playing fair on big events days.


#5

With big news event days like friday, premium and proximity will increase, this is how it works with all optionality products


#6

So what are the options for avoiding this problem? I only started with about $300… would any other option that tracks the market more closely require a lot more capital?


#7

I wanted to “bump” this post to see if I can get some more info on it. I ran into a similar situation as those above. I’ve finally got a good grasp on spreads, the alchemy system, spread scanner, etc. and made some great trades today by following all the rules but got screwed because of proximity. On one trade I was up $90 per contract based off purchase price vs indicative but only made $10 when I had to sell because the market turned and hit my exit rules (NQ). I was under the false impression that if/when I buy when the bid and ask are at low proximity both sides would remain low and not skyrocket and screw up a great trade. My question is that if we have to deal with proximity jumping on us (I bought at 0 proximity but then it jumped to 30-40 when my exit rules triggered) are there certian spread characteristics that are less likely to have such a proximity fluctuation? For example: buying NTM daily spreads, close to expiry intraday spreads, the widest spread, etc? Or, is there unfortunately no way to curb this issue? Thanks for any and all feedback and good luck out there!


#8

The conclusion I’ve come to since then is that it is very difficult to do directional trades on NQ with spreads. Sure, if you get a monster move you’ll make money no matter what happens to the proximity. But the spreads are too narrow and NQ is too volatile to catch the smaller moves.

It’s probably better to use NQ for trades like iron condors that put the high proximity in your favor, and use other markets with wider spreads to do directional trading. That’s the suggestion I got straight from Darrell himself and I think it’s solid advice.


#9

Thanks for the advice! I was a little bummed because I thought I had a good handle on things then got my butt kicked by the proximity… then I thought to myself “oh great, another barrier I have to figure out how to overcome!” Since I am new but tracking pretty well I don’t want to start looking at other trade techniques and styles until I am “fluent” with alchemy. Since NQ can be squirrely for directional trading do you have any suggestions for markets to trade during the day that are more suited for trending/directional trades? Thanks!


#10

FDAX moves a lot, although you don’t get very good return per tick. TF isn’t too bad–some times it can be slow but it gives some good moves. Z (London) moves a lot in the morning but I had trouble getting a good data feed. YM can have some big moves although I haven’t followed it recently. Some of the currencies can make good moves but they spend a lot of time sitting still! :slight_smile:

Just take the NADEX markets and study the historical charts–you’ll figure out which ones fit your trading schedule.


#11

Sounds good! Thank you very much for the advice!


#12

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