How To Completely Avoid Getting Stopped Out When The Market Spikes Against You By Using Nadex Spreads (Part 1 of 2)

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The Problem:

One of the most annoying things about trading is entering a trade, only to have the market spike against you which causes you to be stopped out and three seconds later, the market is right back in the original position, going in the direction you had thought it would go.

You were right, you knew you were right, but you didn’t even have time to enjoy being right as the market spiked against you and knocked you out. This happens so often that there is a technical term known as Whipsaw.

Whipsaw is a painful experience. If you’re like most traders, you’ve probably tried different ways to avoid getting stopped out. You have searched for the magical system or guru that will end all the pain. Fortunately, there is a way to trade where you can eliminate this whipsaw pain altogether.

If you like to swing trade, trend trade or even scalp ETF’s, Futures, FX or Options on a daily basis, then this strategy is for you.

The Standard Solutions:

Until this new way to trade was released, there were a few ways to deal with whipsaws:

1) Stop Orders. You could place a stop order, only to watch it get hit. After a few hits, you are either too nervous to trade, or you stop placing stop losses altogether.

2) Mental Stop. Choosing a mental stop is very risky. It’s difficult to stick to your stop and close a losing trade. When you don’t stick to it one time and the market goes in your direction, you reward poor risk management. When you don’t stick to your mental stop and the trade goes severally against you, that loss can devastate your account or ruin your trading psychology.

3) Trade a smaller size. This does limit your risk, but it also limits your reward.

4) Cover your position with options. The options do not provide a true adequate hedge due to all the complexities of options Greeks.

5) Trade standard call and put options or other complex options strategies. There are dozens of option strategies you can implement, but they all have the same challenge of having more risk than you may be comfortable with.

The truth is that getting into the trade is the easy part. You must learn how to manage risk in an effective manner and eliminate whipsaw. This better way to trade will help you.

A Better Way To Trade:

This strategy is called the “Box Spread.” You may have heard of the technical term Bull Spread, but don’t let that term fool you. If you buy, it is bullish; if you sell it is bearish. It is not a call or a put option. It is not a debit or a credit spread. It is a Box Spread, so keep reading to see how it works. 

The Box Spread can be applied on:

S&P 500
Nasdaq 100
Russell 2000
Dow Jones 30
FTSE 100
Nikkei 225
Eurex Dax
Gold
Silver
Copper
Oil
Natural Gas
Corn
Soybeans
EUR/USD
GBP/USD
USD/JPY
AUD/USD
USD/CAD
GBP/JPY
USD/CHF
If you are experienced at trading or want to begin trading any of these products using instruments like ETF’s futures, commodities, Forex or options, this is an alternative strategy you will want to embrace. You can even trade it if you only have $100 in your account.

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How Do Box Spreads Work?

A Box Spread has four parts: Entry, Exit, The Floor and The Ceiling. The Floor is the price (strike) at which your profits are capped to the downside if you are selling the box. The Ceiling is the price (strike) at which your losses are capped to the upside if you are selling the box.

Let’s look at a chart to clarify this. Click HERE.

The left hand side of the chart shows your entry which in this example is 2034.00. Your exit, if held to expiration, is the right side of the chart (2033.5.) The floor is the bottom of the box which is 2025.0 and the ceiling is the top of the box, 2035.0.

As you can see from this chart, the market did move above ceiling, but since your losses were capped at 2035.0, you did not lose anything beyond the maximum risk. Likewise, if the market had moved beyond the floor of the box, you would not have made any additional money past the maximum profit potential.

The spreads are available to trade on weekdays. New spread strikes are made available throughout each day helping you easily find trading opportunities on a variety of markets.

Tick Value:

All Box Spreads have a value per tick of $1.00. This makes them much easier than futures that have varying tick values. A tick is the minimum move an instrument can make. For example, a stock ticks in cents, i.e. 105.01, 105.02, 105.03, etc. The penny or cent is the tick as it is the smallest incremental move.

US 500 Spread:

The Box Spread that tracks the S&P E-mini Futures is called the US 500. It ticks in .1. If we refer to the chart example above, a move from 2034.0 down to 2033.9 would be a move of one tick. A point is a one dollar move, so when it moved from 2034 down to 2033, that was a one point move. To figure out what this point move is worth, you have to remember that since the US 500 ticks in .1, you then divide the one point by the .1 tick which equals 10. (1/ .1= 10) This means that a $1 (point) move is equal to 10 ticks. On all spreads, each tick is worth $1.00. Therefore, a one point move is worth $10 on the US 500 (10 ticks x $1.00.)

**Side Note: Each point on an S&P 500 Futures full contract is worth $100. On the S&P E-mini each point is worth $50 as the mini is worth half the amount of a full contract. Since the S&P 500 E-mini futures have a one point value of $50 per point, you will need five US 500 spreads to equal one S&P E-mini contract for each point move in the total spread position to have a value of $50.00. By doing this, you have a position that is similar to an S&P 500 E-mini Futures contract.

Spread Value:

It is called a spread because there is a distance, or a spread, between the ceiling-strike and the floor strike. If you refer back to the chart above, you will see that it was based on a US 500 2025.0-2035.0 spread. You can scan the available spread and choose the one that fits best with your trading plan. To find the spread’s total value, simply minus the floor from the ceiling: 2035-2025 = 10.0 points or 100 ticks. (10 points / .1 ticks) for a total value of $100 per spread. (100 ticks x $1.00 per spread.) Let’s assume that you want to sell/short the US 500 and have a position similar to an S&P 500 E-mini Futures contract so you trade five contracts. Your total value will be $500. ($100 per spread x five spreads.)

Maximum Risk:

If you short (sell) the Box Spread, the risk is defined as the price you went short the spread less the spread’s ceiling. In our example, the ceiling is 2035.0 and you went short at 2034.0. Therefore, you have a one point risk, or 10 ticks which means your risk is $10. Since you are shorting five spreads, your total risk is $50 ($10 x 5 spreads.) Note that the risk is also the margin. The best benefit is that you will NOT be out of the trade if it moves above the ceiling.

You may be down, but you are not out.

The most that you can be down is the maximum risk no matter how far the underlying moves against you. Therefore, you have until the Box Spread expires before the trade has to be exited, but you always have the option to close the trade at any time. As you can see in the example, there were many times you might have closed your trade for a better profit than you received if you held on to it until expiration. If you have not closed the trade at expiration, it will simply be cash settled for your net P/L (Profit/Loss) within seconds of its expiration.

What if the Market Settles at the Same Price You Sold the Spread?

If you sold the spread at 2034 and the market settled at 2034, then you would not have any loss. For every tick above the price the spread was sold at and the market settles, you would have a loss of $1.00 per spread up to the ceiling. For every tick below where the spread was sold at and the market settled, you would have a profit of $1.00 per spread.

Margin:

In this example, the maximum amount of margin you have to put up is $10 per spread or $50 for five spreads. Since your risk can never increase, you will never have a margin call. In addition, the spread will cash settle if you do not close it by expiration, so you do not have to worry about the exercise risk of being short the future like on a put option.

Leverage:

Leverage is defined as the trading of the instrument or underlying instrument value divided by the amount of money you have to put up. If the S&P E-mini is at 2034 and each point is worth $50, then the actual value of the futures contract is $101,700. The margin requirement of $50 on the US 500 results in a leverage of 2034:1 (2034 / 50 = 2034:1). The leverage is massive and the risk is completely defined because the risk and the margin are one and the same!

Profit Potential:

The maximum profit you can make on the trade is capped at the floor with is 2025.0 in this example. To determine your profit potential, simply subtract the floor from the price at which you sold the spread. 2034-2025 = 9 points which equals 90 ticks. At $1.00 per tick, your maximum potential profit per sold spread is $90. You are selling five spreads so your total maximum profit potential is $450 ($90 a spread x 5 spreads.)

Bottom Line:

The Box Spread allows risk management to be taken care of so you can focus on entries and profit management. It eliminates whipsaws as you won’t get kicked out of a trade again on a false reversal.

In Part 2, you will be able to see an example, comparison and the completion of how to avoid getting stopped out when the market moves against you.

If you would like to learn more about how to trade Box Spreads along with different strategies and systems to incorporate in your trading plan, go to www.apexinvesting.com. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the chat rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 9000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, forex, stock and options, and gain an edge for successful trading overall.

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Posted In: Binary Optionsapexinvestingbinarybinary chartsbinary optionsbinary scannerbinary signalsdarrell martinday tradinghow to tradenadex binariesnorth american derivative exchangepremium collectionscalpingspike strikerspread optionsspread scannerweekly options
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