There's a New Option for Forex Traders

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There’s a New Option for Forex Traders

Gail Mercer / TradersHelpDesk.com

 

Due to the past increased regulation and capital requirements there are few firms offering forex within the U.S. resulting from a mass exit...  However, there is another option for forex traders that offers foreign exchange with no margins required – It’s Nadex or the North American Derivative Exchange. Since Nadex is an exchange, their role is to simply match buyers and sellers within the market place offering binary and spread options.

Since the availability of forex brokers has decreased substantially during the last year, traders are seeking alternatives to trading the spot forex markets.  The good news is that Nadex Binary Options and Spreads allow traders to participate with trading products based on one of the most liquid markets in the world, the forex market, with a limited risk and limited profit outcomes.  This is especially great news for the counter-trend traders.

Counter-trend trades are appealing because the price action tends to accelerate when it moves in the trader’s favored direction.  Although traders should not try to pick the top or bottom of a market, it’s often tempting to do so.  However, if trading futures or forex using this strategy, can be quite costly because the trader’s risk exposure is unlimited.  This is where Nadex changes the game for counter-trend trading.

Nadex Binary Options are a limited-time based trade that limits risk and provides a settlement payout of $100 per contract if finishing in the money at expiration.  When trading binary options, the trader selects a risk level that they can accept using either an Out of the Money (OTM), At the Money (ATM), or In the Money (ITM) binary.  Once the trade is executed, the trader cannot lose more than they paid on entry.  Plus, when trading with Nadex Binary Options, the trader may choose to close a position out early, prior to expiration to minimize losses, if the market turns against him.

The Nadex Spreads allow traders to increase their risk to reward using a floor and ceiling combination.  If going long, the trader limits their potential loss using the floor price and their profit potential is limited by the ceiling price.  If going short, potential losses are limited by the ceiling price and the profit potential is limited by the floor price.

Below are three great examples of how to use a combination of different binary options expirations and spreads based on the EUR/JPY.  Take note of the two EUR/JPY charts indicating that the market was over-extended to the downside on February 22, 2017.  The 60-minute chart Stochastics was below 20 (identified with the yellow circle) after a substantial down move with the 15-minute chart indicating trend divergence because price was making lower lows but the Stochastics was making higher lows (yellow dotted lines on the chart). 

 EURJPY 60-Minute and 15-Minute Charts

EURJPY 60-Minute and 15-Minute Charts

The issues for counter-trend traders is the market could continue trading lower and, if trading a regular spot forex account which uses leverage and requires margin, a sudden move could be disastrous.  This isn’t the case with the binary options and spreads because the maximum trade risk is accepted upon entry.  Additionally there are an abundance of different binary strikes and expirations offered throughout the day and night.  For example, with a bias to the downside, the following binary options trades were placed:

  • EUR/JPY > 119.05 by 11am – Risk $32.75 per contract, excluding exchange fees
  • EUR/JPY > 119.20 by 3pm – Risk $24.25 per contract, excluding exchange fees

 EURJPY

 

When buying a binary option, the price of the underlying market simply needs to be higher than the strike price at expiration.  In these examples, the underlying market is the EUR/JPY so the spot price simply needs to be greater than 119.05 by 11 am New York time and greater than 119.20 by 3 pm New York time.  The combined risk on both trades is only $57, based on trading one contract, excluding exchange fees.

Using the Fibonacci retracements lines on the 240-minute chart, a retracement to the 61.8 area at 119.67 could also be anticipated or about seventy-two pips.  This makes the trade an ideal setup for using the Nadex spreads, as well.  A long spread was entered for the EUR/JPY 118.70 – 120.70  3 pm New York time expiration , entering  the spread price at 118.93 for a total risk of $23 per contract (excluding exchange fees)

The trader now has three long positions on the EUR/JPY and, if trading only one contract each, the combined risk on all three trades is only $80 (excluding exchange fees).  This means that if all the trades go against the position, the trader’s total loss is limited to $80 plus exchange fees.

While the trader could hold the positions until expiration, with Nadex Binary Options and Spreads, the trader can also exit early.  In these examples, the EUR/JPY price did move higher very quickly and profits are achieved on each position as shown on the charts below.

 

EUR/JPY 11 am Exit 
EUR/JPY 11 am Exit 

 

EUR/JPY Daily Exit

EUR/JPY Daily Exit

 

EUR/JPY Spread Exit

EUR/JPY Spread Exit

Here the trader planned for the worst-case scenario by limiting his losses on entry, knowing the maximum trade risk. In this example, the market happened to work out in the trader’s favor and he profited on all three positions by exiting all of his positions around 11 am New York time. However it doesn’t always work like this but using the Nadex trading products, the trader can weather the initial storm of adverse price movement with knowing the trade risk up front.

Nadex provides a free demo account for traders to use to learn how to utilize binary options and spreads, as well as free educational resources (including free educational webinars).

 Nadex Risk Disclaimer

· Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.

· Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.

 

 

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