By Darrell Martin
In many of the articles you see here, Nadex Spreads are often mentioned. You probably have noticed the suggestion to use them when trading certain News Events when setting up an Iron Condor strategy. The purpose of this article is to clarify and solidify what a spread is in order to help you use it to your advantage when trading.
What are Spreads?
Spreads are short-term contracts based on an underlying market. The floor and ceiling levels on Nadex Spreads define the lowest and the highest points at which the trade can settle. You can trade spreads with low collateral knowing your maximum potential profit, and loss, from the moment you enter the trade.
Binaries or Spreads?
Trading Binary options seems to be all the buzz right now, but spreads are where the long-term game plan is really located. The truth is that spreads are easier, work better and are a lot less frustrating to trade. Spreads are unemotional. There is plenty of profit to be made in trading them. Spreads are a little bit harder to understand, but they are easier to trade. Binaries are easier to understand and a lot harder to trade.
“But I’m risking more money when I trade spreads!”
Not really! When you are trading binaries and you risk $85 to make $15 on a tenth of a tick settlement value, you are risking a lot! On spreads, just because you have to put up more money does not mean you are risking more. If you are going for 10 ticks of movement, and you win, you are going to make $10. In the image below, look at the bid offer spread. It is only one to two ticks wide.
To view a larger image, click HERE
If you want to make $20, you risk $20. It is low risk and it ticks fast. You can go in, place your trade and limit your risk. When this was demonstrated, there had been a great deal of volatility, so that means there was a good chance that the market could oscillate around for the rest of the day. Suppose you only want to risk $20 on a trade. You can enter your trade and then put in a take profit, if you want to make a certain amount on your trade. Remember, you can exit whenever you want before expiration. Set your stop loss. If it happens to expire a couple of ticks below where you entered, you lose $2, so your loss is less than that when trading binary options. When a spread goes against you, it doesn’t hurt nearly as bad as it does when that happens when trading a binary. When a binary goes against you, because it is a true/false statement, you lose all that you risked, up to $100.
What Markets are Available?
Nadex offers spreads on the U.S. Stock Indices, Forex and Commodities.
How Can Spreads Be Traded?
As a trader, you can use spreads in trading several strategies and conditions. Some spreads offer very tight bid offer spreads with only a difference of one to two ticks. Some are a little wider with four ticks. Spreads can be traded neutral, directional or breakout and depending on what trade you are going to do, you have choices. When there is an upcoming news event, you can use strategies involving the spreads with limited risk offering substantially more profit than binaries. If the market is flat, there are neutral strategies you can employ for your benefit.
What About Leverage?
When you trade Nadex Spreads, your max risk is put up at all times. However, you still get massive leverage such as controlling a mini lot for $25. Literally, you control a mini lot for $25! Is that a good deal? It is such a better, safer, easier way to trade! As was recently demonstrated on The Diagnostic Trading Hour, a mini lot of EUR/USD was compared to trading a Nadex Spread. With a mini lot, you need 10,000 units of currency at 1.0876 (sell price) with 50:1 leverage which gives you a margin of $217. In addition to the $217 margin, you would be required to put up your floating P&L. Compare: $25 or $217 and that is not even max risk! It’s a no brainer which has the best leverage and offers the best deal.
Hopefully, this gets you excited to learn more about spreads and the many ways to trade them. In another article in this series, you can discover how to use Nadex spreads as part of the ultimate hedge strategy. To further your trading education, go to www.apexinvesting.com, a service provided by Darrell Martin.