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Trusting the Probabilities on a Nadex FTSE 100 Strategy

TradingPub Admin | July 10, 2015

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Today's Nadex trade for the FTSE 100 Index required trusting a key indicator along with historical probabilities of success for a strategy that has been backtested for several months. The FTSE100 is an index of the top 100 companies traded on the London Exchange.

Over the past 62 trading days, the FTSE 100 has displayed a pattern between 9am-11am EDT that has repeated itself 47 out of 62 times, or slightly better than 75 percent of the time. If you followed the rules of this strategy, and got in on every trade, then your trade would have expired successfully 47 out of 62 times.

Today, it looked like an exception to the rule was coming into play. The setup looked dangerous, and the trade required patience for the right entry.

But first, here are the rules for the 9am-11am FTSE 100 "Footsie" Strategy:

07.09.2015_FTSE_Setup
FTSE Trade Setup Chart

Notice the 9am hourly candlesticks above. Can you see that the following 10am candlestick never challenges the opening price of the 9am candlestick? In fact, the 10am candlestick tends to continue in the same direction that was established by the 9am candlestick. To back test this, simply pull up the hourly charts of the FTSE 100 on Investing.com and go back 60 days. Compare the 9am EDT hourly candlestick  to the 10am hourly candlestick. You will see how frequently this pattern repeats itself.

The same phenomenon occurs with the 7am-9am German "Strudel" strategy that I have written about extensively. Complete rules for the "Strudel" strategy are included in the free eBook from TradingPub, entitled "Trading Made Simple: Strategies that Risk $100 or Less".

The rules for this new strategy are very simple to execute:

  • Select the 9am-11am EST Nadex time period for the FTSE 100 Index.
  • If the 9am EST hourly candlestick is BULLISH, then BUY at the first Nadex strike price available BELOW the opening price of the 9am hourly candlestick.
  • If the 9am EST hourly candlestick is BEARISH, then SELL at the first Nadex strike price available ABOVE the opening price of the 9am hourly candlestick.

This strategy has been very consistent over the past 3 months. Just be patient and watch the 9am 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 10am, after the 9am hourly candlestick has closed.

Trading this strategy today required patience and caution, as the chart below illustrates:

07.09.2015_FTSE_Trade
FTSE Trade Chart

The FTSE 100 Index had been riding a very steep uptrend for 7 consecutive hours going into the 9am hour. The 9am hourly candlestick was also developing bullish, but it was also gapping significantly away from the 8 EMA indicator. When the market gaps away from the 8 EMA (also known as the "T-Line") it almost always has to come back. It's like a rubber band. You can pull the market away from the 8 EMA, but it always snaps back.With a bullish 9am hourly candle, it would normally automatically trigger a BUY at the first strike price below the 9am open. But I didn't like how far the market had gapped away from the 8EMA, and I sensed it would snap back with a vengeance. So I decided to sit on the sidelines and wait to see what the market would do.

Sure enough, the market snapped back with a vengeance. It blew through the strike price, and kept going all of the way down until it touched the 8 EMA.

So now I had a decision to make. Will the market reverse direction and head back north, and settle above the 1st strike price below the 9am open? With 40 minute left in the trade, it sure didn't look like it. But I reminded myself that this strategy has a 75% success rate, and a reversal looked like it was imminent. If I placed that trade, it was an Out-of-the-money trade, risking only $30 to make $70 per contract. Low risk, high reward. I pulled the trigger and went for it. Here's how the trade played out.

CHART 3 5 Minute

From 10am-10:30, the market kept going downward until it touched the 8EMA on the Hourly charts. Then it abruptly reversed and headed straight up, expiring for a full profit of $70 per contract, less $1.80 in exchange fees.

07.09.2015_FTSE_TradeDetails
Trade Details

Conclusion:

In hindsight, this was a trade I probably should have passed on.  It wound up working out exactly as I had predicted, but it could have easily lost. The market had to dive sharply toward the 8 EMA, and then bounce back up. I also had to have confidence in the recent historical probability of success. Those were two variables I had to trust before I pulled the trigger. But since I was only risking $30 per contract for a potential $70 reward, I wasn't too nervous.

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Cheers,

The Trading Pub Team