By Darrell Martin
A trader recently asked if Nadex was good for scalping five to ten pips trading spreads. He also commented that he had noticed others talking about getting quick returns, but whenever he got in a trade, he was immediately in the negative, even when the proximity is one or two. He felt that starting in the negative seemed like a hard way to get quick pips. Some seasoned traders tried to help him understand some of the basics of trading, as well as answer his questions.
Trader J told him that he needed to understand about the bid/ask spread that is on all of Nadex instruments. When trading, the bid/ask spread must be covered before any profit is made. The bid/ask spread is the difference between the two prices. This amount varies from market to market and time of day. For example, look at the tickets below. The first one is for a Gold spread.
The bid price is 1262.9 and the offer or ask price is 1263.5. If an immediate exit were wanted, it would be a loss. Since the trade was bought at 1263.5, if sold immediately, the sell price or bid is 1262.9 to get out and would create a loss. If sold for 1262.9 to enter the trade, for an immediate exit, it will have to be bought at 1263.5 to get out of the trade. Until the opposing price moves to the price paid to enter the trade, there is no profit yet. However, knowing this will always be the case whenever a trade is entered, it becomes less of a shock and simply part of the trade.
The image above illustrates the bid/ask spread for an AUD/USD binary contract. The difference between the two prices must be overcome before any profit is realized. In this case, if bought at 72 to enter the trade, the bid or sell price must increase to more than 72 before making a profit. If sold at 64, the offer price must go down to below 64 before becoming profitable.
Trader G tried to reassure the trader about scalping that yes, it’s good and possible if done at the right time. He reminded him that in addition to the width of the bid/ask spread variance with instruments and time of day, there is also the proximity to expiry to consider. How soon or far away is the spread choice from expiring?
Trader J added that time value, distance and speed all impact choosing the right spread with which to scalp. To this statement, Trader G told of his experience when trying to scalp on Nadex during the wrong time of day and how painful that can be. It is important to learn all about the different markets and how they work at various times of the day.
Trader D summed it up by saying that no matter what is traded, it starts out on the negative with the bid/ask spread. For scalping, futures, Forex and binaries are preferred, where about 10 ticks can be collected.
Spreads must have a very tight bid/ask spread and be in the middle of the floor and ceiling with very low proximity. They must have plenty of room to move to ensure maximum speed. These are the things traders have to know to watch out for and what to look for in a spread. The biggest thing to understand when scalping is premium.
The top mistake he sees people make is trading NQ (E-mini NASDAQ-100 Futures) spreads and wondering why it isn’t moving correctly. NQ is very narrow, so if traded, understand that it will have a much larger premium impact making it harder to mirror the market on NQ spreads. SI (Silver) and HG (Copper) have massive tick sizes compared to the underlying, so don’t try to scalp with them.
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