The Trend Catcher system using the Chop Filter is used the same in spreads as it is in futures. The settings are the same and the entries are the same. If you have not already, please go through the webinar at the top of this link, please take the time to do it now. All the details you need to trade this system will be found in the following post.
What Markets Will Work & A Note of Caution on Specific Markets: You can use this on all markets, but special caution should be given to the following markets: Silver, Copper, FDAX and FTSE. These specific markets on Nadex all tick slower on the Nadex spreads than the underlying market.
Why does this matter? If you choose to select these spreads, you will see little profit and little loss on larger moves. So unless you are either looking for just a super low risk/low profit, live practice spread or unless you plan on trading a large amount of size, these spreads on these markets are probably best avoided. DAX ticks in 0.5 at the value of 14.00 US or 12.50 eur, so 1.0 move is about $28 USD. Nadex Dax spreads tick in 1.0; so on that same move you would make $1.00. Either be doing more or don’t trade them. They are not “bad” to trade, you just have to do more size on them to make the movement worth it. So if you don’t like the Dax being worth $28/point and you do not want to put up $2500 in a day trading margin to trade it, you could trade 5 or 10 of them and make the tick/point value $5.00 ($1.00/tick x 5 ticks) versus $28. Just be aware that if you see it really move, you may only have made $10.
How to choose the spread: Use the Spread Scanner:
Time Till Expiration: Set time to expiration to be a minimum amount that will basically eliminate all the other spreads. For example if its 10 AM set it to be a minimum of 120 minutes till expiration so you only see the 4:15 PM Spreads on say Small Cap 2000. This is important!
Also remember if your only 2 hours away from the say 4:15 expiration on a US Indice, you will need to remove this minimum time filter or you won’t see anything as they will all expire in 2 hours or less.
Chose only the end-of-day expirations, i.e., 4:15 on US Indices, 3 PM on fx, 2:30 on oil, 1:30 on gold, etc.
If you are not sure what the latest expiration is, click reset filters and look at the latest expiration time for that instrument and you will know.
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Proximity
Trade the ones within +5 to -5 proximity from the underlying. There will only be 1 or 2 choices. If you do this, it is super easy. Find the spread with the most profit potential where the market is closer to the center of the spread. Choosing this spread will allow you to not have to deal with the weird “optionality” that causes spreads to slow down when they are moving in your favor. That way you can mirror the futures markets. With the spreads you can do quantities of 1, 3, 10 or 20 so you control the tick value as each tick is $1.00 a tick/pip on all spreads; so if you want to risk $3 a tick/pip, do 3 spreads. You want to find one with decent profit potential since it moves very slow when it is near the edges of the spread. Buy it when the chart gives you a buy entry and sell it back when the chart tells you there is a sell entry. It will move along with the underlying.
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In the image above, you will see 3 possibilities for a sell setup for crude oil.
Contract 1 has the same expiration time and same proximity same (MAX) risk but less profit.
Contract 2 is better than 1 easily.
Contract 3 is preferred do to the 30% rule. It has more room, more profit and more time if it moves fast. If account has $500, you can still do this one, remember stop trigger risk is like $35-40 on a 12-tick bar
Risk/Reward Ratio
Enter .70 as the minimum risk to reward ratio to help ensure you are choosing a spread with plenty of profit potential before it runs into optionality. Ideally the Risk/Reward Ratio is closer to a .80 or higher, but by using .7 it allows you to see the choices available without them appearing and disappearing off the scanner due to just a few ticks.
Planned Risk Versus Max Risk
Most traders when they do this see, “wow, a max risk of $100, $200, $400,” and freak out a bit on 1 contract.
It is important to understand 3 things:
Just like we know the market would have to move a ton to get that max risk on these wider spreads, it would also have to move a ton to suffer that max loss. This is nothing like a binary where a tick or two means all or nothing.
We plan on exiting per the stop trailing rules in Trend Catcher. This means that we should expect a loss of about 35-40 ticks and often less on a losing trade. So this is the expected risk versus max risk. Traders easily risk $35-$40 on a binary, thats nothing on a future. So look at your expected risk by exiting via the system rules not the “margin” aka max risk.
This is the MAX risk. This means if the market flew the maximum distance against you and you NEVER closed the contract, then yes, that would be the max risk. Think flash crash or CHF unpegging the EUR/CHF, etc. Remember in futures and spot forex you basically have no max risk. except down to 0 of the total value of the contract. Which can be $120,000 on a single future. It is improbable to expect Gold to drop to 0 on GC Futures. Margin is there to help protect you from owing the broker if it does move against you fast. It can move way further and you still can end up owing money, that is called a margin call. This will NEVER happen on Nadex as your “margin” is your max risk and your risk will NEVER increase past that max risk which is 100% defined up front. So in a worst case world blows up scenario you know the max risk even if you plan on not taking it as you plan on exiting earlier than the max risk per the system rules should the market move against you.
Use The Stop Trigger To Manage Risk (and even entries)
The market can move fast. It is wise to put up the stop trigger indicative based on where your stop loss is located and then trail it with your trailing stop by adjusting the indicative. You can always cancel it and get out at market, etc. But its good to have it there in case you look away for a split second at another chart, email or answer cell phone, etc., and miss moving manually exiting, you have that trailing stop/stop trigger in there helping you. Simply click the exit icon on the scanner then choose stop trigger and enter the indicative of the initial stop. Then adjust that each time the TC moves, a swing bar happens, TC moves again or, of course, if it flips to exit and goes the other direction.
Below is an example of a trade Darrell was in using TC in spreads with the Stop Trigger working.
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To see the spread settlement calculation, see the image below:
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For additional education see also basic Nadex education on the platform and spreads under education in the forum as well as scanner education and stop plug-in course under scanner.
