Leverage with Nadex Spreads Compared to Futures Day Trading

In the second part of this four-part series on comparing leverage, trading Nadex spreads to trading other instruments, we will look at the differences between the leverage you get trading Nadex spreads, to the leverage you get trading futures. As stated in our first part of the series, Nadex spreads have the great combination of increased leverage with limited risk. This is significant when comparing to day trading futures. A Nadex spread is a simple derivative of an underlying market, with a built in floor and ceiling level that defines the lowest and highest points that it can settle. The floor and the ceiling establish the points where the risk stops. Whether you buy or sell the spread, you can’t lose additional funds, if the price moves against you past the ceiling if you are long, or moves against you below the floor if you are short.

Let’s compare an equalized EUR/USD day trade size of 125,000, which is a position day trading 1 contract of the EUR/USD futures/6E, to a position day trading 12.5 Nadex Spreads. You can’t trade half of a spread, but for comparison purposes, we’re using 12 and a half spreads for equal sizes. First, you can see that to place the trade for the futures, you need a margin of $500. Your leverage in turn will be 250:1, which is pretty good, and that gets you a leveraged value of $125,000, or 1 futures contract. However, when you look in the far right column, you will see the Nadex spreads gets you double the leverage! At 500:1, you only have to put up half the money as the future trade, or $250 to leverage the same value of $125,000.

What about risk? Again, Nadex spreads have the advantage. In the "P/L moves down row", showing example losses, Nadex spreads lost only $250, while the futures lost into the thousands, at a much higher $3125. Profit is comparable though. Had the trade been a winner and price moved up, Nadex would have profited with $2875, similar to the futures trade possible profit of $3000.

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Another very significant point is when day trading futures, you have uncapped risk. Futures margins have unlimited risk, down to zero if you are long, and infinite risk if you are short and the market continues going up. Nadex spreads, in contrast, have capped risk. With Nadex spreads, you only need $100 to start, and only need to cover your max potential risk when opening a position. There is no minimum account balance you need to maintain, either. Actually, because the risk is capped and defined up front, the leverage is high, and the upfront collateral to trade is low, Nadex spreads are great for hedging futures day trading positions.

To continue to learn more about Nadex spreads and how to trade them, you can visit www.apexinvesting.com. APEX provides education, tools for trading, including the spread scanner, and chat rooms for support. In the APEX chat rooms, experienced and up-and-coming traders help each other gain an edge and be successful in trading. On the website, you can sign up for a free trial and experience the training webinars, and other trading tools. If you go to www.nadex.com, you can sign up for a demo account and learn more about Nadex spreads.