By Darrell Martin
News can be tough to trade. The markets are unpredictable and even when it’s thought they will react one way; they can go in the complete opposite direction. That’s why it’s important to use a strategy that has the possibility to profit regardless of the direction of the market. Consistency in the distance and kind of move is important to note as well.
Scheduled news events can be tracked for consistency. Coming up on Wednesday, February 1, at 4:30 AM ET, the Manufacturing PMI will be released for the UK. This report on average over 12 - 24 months has shown to move the markets quite a bit. A Straddle strategy using Nadex GBP/USD spreads can be a high probability trade in this circumstance.
Two spreads are traded in order to prepare for the market moving in either direction. One spread is bought with its floor where the market is trading at the time and one spread is sold with its ceiling where the market is trading at the time. The floor of the bought spread meets the ceiling of the sold spread. The floor and the ceiling mark the lowest price to the highest price of the underlying market the spread covers. Those numbers are as far as profit or loss can go even when the market goes beyond those points. The trade is still active until it is exited or the spread expires.
Entry can be as early as the night before at 11:00 PM ET Tuesday for 7:00 AM ET expiration. The total risk should not exceed $40 combined, or around $20 for each spread. With the risk being at approximately $40, the take profit orders should be set for around $80 or 80 pips above and below where the market was at entry. At $80, the cost of both spreads are covered, as well as making a $40 profit for a 1:1 risk reward ratio. The chart below shows at settlement, depending on where the market is, how much profit and loss would be for each side of the Straddle.
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A Straddle strategy has such a low risk that no stop orders need to be placed. Looking at the chart above, it shows when the market moves 40 pips in either direction, the cost of both spreads have been covered.
For free access to the spread scanner, including the trailing stop feature and for free day trading education, visit www.apexinvesting.com.