By Darrell Martin
So you want to day trade futures or maybe you already do, but the amount of risk on each trade leaves you squeamish and your pulse racing every time you enter. What if there was a way to trade the futures without so much risk? Well, there is! Take a look at this example of how to trade a Nadex Spread just like a futures contract. Darrell Martin does a little Q and A session with a new trader, about how to trade the Dow using a Nadex spread.
Darrell: Spreads are so simple, they just mirror the market. You literally just open up the Apex Nadex Spread Scanner, and find a spread that has an end of day expiration, with little to no proximity on it, and enter. That’s it. A super easy way to trade if you want to lower the amount of your account at risk. You just pick the spread that mirrors the underlying market you are trading and you can exit anytime, if the market goes against your trade.
New Trader: So, then I need to go through the Nadex training, correct? Is that on the Nadex website?
Darrell: Yes. There are simple to follow short videos to get you going, and you can easily sign up for a demo account. Let’s take a look at the Dow or YM. Here you can see that this spread’s proximity to the underlying market is 3 ticks and it expires at 4:15PM. You can buy it or sell it when your chart is telling you to enter. You know the Dow or YM right?
New Trader: Yes.
Darrell: On the Dow, a tick is worth how much?
New Trader: $5.00.
Darrell: Well, on all Nadex spreads they have a tick value of $1.00. The Dow is quoted exactly the same in ticks, whole numbers. If I buy the YM at 16958 and sell it at 17000, how much do I make in ticks?
New Trader: I don’t know. I have never traded spreads.
Darrell: Ok, if I bought the futures YM contract at 16958 and sold it at 17000 how many ticks did I make?
New Trader: 42
Darrell: Great! Okay, now if I buy a spread at 16958 and sell it at 17000 I make 42 ticks, right?
New Trader: Yes.
Darrell: You have two things to think about up front: One is expiration time and that’s easy. Just choose the one that expires at the end of the day at 4:15 PM, so you have all day long to manage the trade as it moves and mirrors the market, just like you would manage a futures trade. The contract literally says the expiration time in the name, 4:15PM. Ok?
New Trader: Sure. I just don’t understand spreads. How do I choose the correct one?
Darrell: Well, like I said, you have two things to think about, one is expiration time and the other is how profit and loss works. P/L on spreads is just like on futures. It is price entered minus price exited. Does that make sense?
New Trader: Right, I see that does make sense. I also see the expiration time. But how does that translate into dollars?
Darrell: Ok, so you understand the expiration time and you get the P/L in ticks is price entered minus price exited. Based on that, using the example, above we figured we had 42 ticks profit. Right? Well, from there, it just gets easier because every tick on EVERY single instrument on Nadex is worth $1.00. That’s right. All of them: CL, YM, ES, NQ, GC, the metals, the ags and the 10 Forex pairs. Everything is worth $1.00. So if you make or lose 42 ticks, you made or lost how many dollars?
New Trader: If every tick is worth $1.00, then it would be $42.00. That doesn’t seem like much though.
Darrell: You can do 1 contract, 10 contracts or 100, etc. You understand every spread ticks in an increment of a 1 (1 on Dow, .1 on TF, .01 on CL, etc.).
New Trader: Ok. They all tick in an increment of 1, and every tick on every single spread has a value of $1.00. Therefore, the number of ticks I make or lose equals how many dollars I made or lost on 1 contract from entry to exit.
Darrell: That’s right. You got it.
New Trader: Just like on a future, if I sell higher than I buy, I make money. If I buy back lower than I sell, I make money. But if I buy high and sell low, I lose money and if I sell low and buy back higher, I lose money. It is just like stocks, futures, forex, and options, or any market traded. My P/L is the difference between where I enter and exit. But, I still don’t know how to pick the right spread.
Darrell: Going back to the scanner, there are two filters to simplify this. You should use “risk to reward” (don’t worry about what it means yet), and “A” (at the market), for proximity. If you enter those 2 filters, it will drop the spreads you don’t want. Regarding risk reward, we will cover this. Just understand it as a first step on the scanner for now. Ok?
New Trader: Ok, but what does the A or “at the market” mean?
Darrell: You need to be as close in proximity as you can to the underlying market. We achieve close proximity choosing the A (at the market in the filter). It will only show us spreads that are close to where the market is trading currently. There is some “premium” in spreads as they are an option. This just means, for simple terms, time value. So, if the proximity is at about +3, then the offer price is 3 ticks higher than YM. Or if the proximity on a sell says -2, then the bid is 2 ticks lower than YM.
New Trader: You lost me.
Darrell: See the price is 16970 on the spread and the price on YM is 16967. That is 3 ticks difference. That is the proximity. You just want this number to be small. Hence, that is why we hit the A for “at the market” spreads and by choosing the A, you filter out all spreads that aren’t “at the market”.
Darrell: Does that make sense on proximity? You want a spread that has close proximity or else it’s going to have to move further to profit.
New Trader: Now it does. So, is the price the bid/offer?
Darrell: Yes, just like when you buy YM, you have a bid/offer, simple enough, right? Risk/reward and floor/ceiling will be covered next. You just need to make sure you got the buy/sell, bid/offer, price.
New Trader: Looking at the scanner, I can buy at 16962. On that top contract, the right side is the offer price, the buy price.
Darrell: All of them are actually priced right now at 16962, on the offer side when buying.
New Trader: So, which contract and which strategy (Apex entries, MVP Reversals, Poppers, Scalps, etc.) do you recommend?
Darrell: All 4 of those strategies are good. You just want to pick a strategy where you stay in long enough for the market to move, for the spread to profit. You can trade any market condition, and regarding contracts, that is up to you. Focus on one strategy and one market then add on others. On energies, CL is good. For ags, try soybeans ZS. If you want to trade metals, Gold is good. In the indices, TF and DAX, they’re all great. Looking at the currencies, both USD/JPY and GBP/JPY tend to move. Do you understand the bid/offer is the price you buy and sell at? If buying, you’re buying at the offer that is listed under price on the right side.
New Trader: Yes, 16962 is the buy price, but what is 16958? Is that the bid price or sell price?
Darrell: Just like on futures, you have a bid/offer, so, yes. The reason it says “Buy” next to it in green on the scanner is because that is what all the calculations to the right are based on if you’re buying it.
New Trader: Ok, I understand that I can sell the 16900 to 17200 spread and the bid or sell price is 16958.
Darrell: Great, now on the YM how much can you lose, if you go long or short, is there a limit? It’s not a trick question.
New Trader: If I buy the spread, I can only lose $62 and gain $238?
Darrell: I asked about the future not the spread, you need to focus. You will get to the spread soon enough.
New Trader: Ok, ok, focus, ok, on the YM if you go long, you can theoretically lose to 0, and unlimited if you sold it. The market could go up and you could lose to infinity in theory.
Darrell: That is the distinction. With a spread, there is a floor and a ceiling. They are labeled on the image. In our example of the 16900-17200 spread, 16900 is the floor and 17200 is the ceiling. The floor is always the lower number on the left and ceiling is always the higher number on the right. If you buy a spread you can only lose down to the floor from where you bought.
New Trader: And you can only profit up to the ceiling from where you bought?
Darrell: Exactly, so if you subtract the offer price from the floor you get the maximum risk. If you bought and the market flew 300 ticks against you, you would still only lose how much? You can do the math, but you can also see it on the scanner, on the right side under max risk/max profit. Those amounts include the fees for a single contract, .90 to enter and .90 to exit. If you have a max loss there is no “exit fee”. Also, fees are included on a single contract
New Trader: Oh, ok. Hence, the 62.90 max loss and the 236.20 max profit.
Darrell: Now, check this out. What if you did the spread above that expiring at 4PM, only 15 minutes difference? What is your max loss on the 16925-17025, if you buy it at 16962?
New Trader: Wow, only -37 ticks!
Darrell: What is every tick worth?
New Trader: $1.00
Darrell: So, if you had a 40 tick stop loss, would there be any reason to even worry about using a stop loss?
New Trader: No!
Darrell: And, if the market flew way against you and came back up, could you actually profit on the trade without taking on additional risk?
New Trader: Yes, I see the benefits here.
Darrell: It does not always happen that way, but when it does, it’s sweet! You just manage your profits. You already know the max risk and if the market is below the floor, you just hope for it to move in your direction before it’s done. Once you master the spreads basics, then you get to have some real fun. That is where the ultimate hedge comes in. You can literally have a 10 or 20 tick risk on a Futures trade, with the spreads hedging it with 100 or 200 ticks, and have unlimited upside with no time limit. That is when it gets fun. You can buy the Future and sell a spread or vice versa. You can do 1 contract, or 5 contracts, 10, 20, 50, 100 or whatever. But you can ratio your risk better at 1.00 a tick and your risk is capped.
New Trader: It’s not capped on a future, that’s for sure. If you have a stop on a future and a flash crash happens, it just gaps past your order, then there is no cap on your risk. I am definitely beginning to see the advantages of trading Nadex spreads and how it can be better to trade than straight futures for limiting risk.
Darrell: There you go, the advantage is better risk control and there are a lot of ways to trade it. The disadvantage is the bid/ask spreads. They are options, not futures, so you will pay a bit more on the bid/ask spread than just round turn fees on futures. But, it’s a small price to pay for most to have lower risk.
New Trader: Darrell, thank you for your time. I can see that I need to trade Nadex and take that training. I need to go pick up my son from football now, but thank you so much.
Darrell: Love football! Have a great day, I hope you can take this and run with it. Don’t let the ticks control your trades, control the ticks with the instruments you trade.
If you want to learn more on how to trade Nadex spreads, go to www.apexinvesting.com, a service provided by Darrell Martin. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 7000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, forex, stock and options, and gain an edge for successful trading overall.