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Trading the DAX “Strudel” Strategy with Nadex Spreads

TradingPub Admin | July 21, 2015

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Every morning, I trade the 7am-9am Germany 30 (DAX) strategy with Nadex binary options. I call it the "Strudel" strategy, because it's a delicious breakfast trade. This strategy was based on the observation from Tom Busby, a veteran Futures trader who observed that the 7am EST hourly candlestick of the Germany 30 (DAX) Index is a pivot point that determines the direction of that market for the following hour a great majority of the time.

The rules for the strategy are remarkably simple:

  • Select the 7am-9am EST Nadex time period for the Germany 30 (DAX) Index.
  • If the 7am EST hourly candlestick is BULLISH, then BUY a Nadex Binary Options contract(s) at the first Nadex strike price available BELOW the opening price of hourly candlestick.
  • If the 7am EST hourly candlestick is BEARISH, then SELL a Nadex Binary Options conrtact(s) at the first Nadex strike price available ABOVE the opening price of hourly candlestick.

This strategy has been remarkably consistent. Over the past 60+ trading days, this pattern has repeated itself about 90 percent of the time. Just be patient and watch the 7am hourly candlestick develop. Once it's confirmed bullish, then buy. If it's confirmed bearish, then sell. If you want to be "super-safe", don't make a trading decision until 8am, after the 7am hourly candlestick has closed.

I have traded this strategy exclusively with Nadex Binary Options since August 2014. But recently, I have taken a closer look at trading this strategy with Nadex Spreads.

Nadex Spreads resemble traditional Futures and Forex trades, with a few differences that I consider to be advantages:

  1. Your risk is defined. You know exactly what your maximum loss or gain is per trade.
  2. You cannot get stopped-out as long as your trade is active. If the market moves against you briefly, your trade is still alive, unless you decide to exit the trade.
  3. Your maximum risk is your margin. If you want to equalize a Nadex trade with a Standard Lot Forex contract, you don't have to put up thousands to cover the margin requirements. In today's trade, 10 Nadex contracts were sold, making each pip worth $10, just like Forex. Instead of putting up over $2,000 in margin requirement, only $700 was withheld to make a maximum of $1,300.
  4. No broker commissions, no middlemen. With Nadex, your orders are placed directly on the exchange, and there's a $.90 cent (per side) exchange fee charged per contract.

Today's "Strudel" Trade with Nadex Spreads

07.21.2015_DAX_Spread
4 Hour Nadex Chart. Click On Chart to Enlarge

Nadex spreads put a "box" around a trade. The floor and the ceiling of the box represent the maximum price range of the box. The left wall is the start of the trade, and the right wall is the expiration time for the trade.

To trade a Nadex spread, you simply follow these steps:

  1. Determine the direction you think the market will be going
  2. Select a strike price of your choosing
  3. If  you SELL a spread, the number of pips between your strike price and the CEILING of the box will be your maximum risk. The number of pips between your strike price and the FLOOR is your maximum profit.
  4. If  you BUY a spread, the number of pips between your strike price and the FLOOR of the box will be your maximum risk. The number of pips between your strike price and the CEILING is your maximum profit.

I haven't done much with Nadex spreads in the past, but after today's trade, I plan to devote more time to practicing with them.

I chose a 200 point spread and wanted to trade 10 contracts to get the same leverage as a Standard Lot Forex trade, where 1 point = $10.  The market was on a downtrend, so I decided to SELL during the 7am EDT Hour, consistent with the strategy I usually use when I trade the "Strudel" Strategy with Binary Options. If the 7am hourly candlestick is developing Bullish, then BUY. If it is developing Bearish, then SELL.

When I entered the trade to SELL after Bearish confirmation, the Nadex Spread I selected offered $700 maximum risk, for $1,300 maximum profit. Before placing the trade, I was prepared to take a $150 loss if the trade moved against me, and I had a $200 profit target. Here's how the trade played out:

07.21.2015_DAX_Trade
5 Minute Nadex Chart. Click to Enlarge

The trade was placed at 7:40am EDT, and the market started grinding downward. Within 30 minutes, I had picked up about 15 pips, or $150. I was well on my way to my $200 profit goal. At 8:30, the market moved from a 20 pip gain back to a 15 pip gain. Was this a temporary retracement, or was it a reversal?  At 8:40, I exited the trade for a 22 pip gain, or $220.

That's the good news. I had a plan and I stuck to it. I reached my profit goal and exited the trade. The bad news is the market kept diving after I exited with a vengeance, all the way through the floor of the spread box. If I would have let the trade run, I could have gotten out at 10:50am for the maximum $1,300 reward. I left $1,100 on the table. And that will buy a lot of Strudels.

Conclusion

I have a lot of work to do with Nadex Spreads, but they have definitely gotten my attention. I know it's a very common trading adage to cut your losses short and let your winners run. Today, I stubbornly kept to a predetermined trading plan, and never gave the trade the opportunity to run. I'm not beating myself up about this, but it will be interesting to see how I adapt my trading plan to take advantage of these opportunities in the future.

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By Cam White, TradingPub