Protecting Profits & Letting Profits Run On Out Of The Money Nadex Binary Options
You may have heard the saying before “Limit your risk and let profits run.” It’s actually a great trading and money management mantra. However, in live trading you have to take it a step further as you don't want a winning trade turning into a losing trade.
You want to protect your profits and still have room to let your profits run. There is a simple technique to do this. When you’ve covered your risk, (by making your risk in profit), you take off half of the contracts.
This enables you to cover your risk during the trade and still leave the table with a profit. Ultimately, with Out of the Money (OTM) binary options, the challenge is not allowing a winning trade to turn into a losing trade while balancing the large profit potential.
Let’s look at a fantastic example that was shown live on July 24, 2014 on the Diagnostic Trading Hour on TFNN. It was a trade in Gold. When the charts were first checked to see if there were any potential trades, Gold was trading at about 1291.
There were two possible contracts to sell, an ITM (In the Money) at 1293 and an OTM at 1290. Since there were only 17 minutes left until expiration, selling the ITM 1293 contract would not be the best choice because the sell price was already down around $5, which only gives a $5 profit potential. Even though the 1290 contract was OTM, the signals on the chart pointed to the market going down.
Because it wasn’t going to be a huge move and there wasn’t a great deal of risk, five contracts of 1290 were placed to sell at $81. Remember, because we were trading on Nadex, each contract had a value of $100.
The risk is calculated on a sell contract, as $100 less the price you sell, for a risk of $19. In order to make up that risk, you subtract the amount of risk from your entry price.
If you want to protect your profits and let them run, you would set your take profit at $62 for half of your contracts. To clarify, you risked $19 per contract when you placed the trade. When each contract makes $19, you’d be at break even. Then, when each contract makes another $19,
you’d exit half of your contracts and you’d be covered if the other contracts fail. But five is an odd number, and you can’t take off a half contract! If you think about it, it would be wise to take off three of the five. Why? Because if you hit your take profit, you will have made 3 times $19 which equals $57, then if the market moves against your other 2 contracts, you will still have $19 profit. You want to leave the other two contracts on in order to let your profits run.
The image below shows the open and working orders.
It’s important to remember that the market likes to go where the orders are, but how can you know where the orders are? You can employ the use of the DOM, which stands for Depth of Market.
To view image click HERE
When using the DOM, seek one with five to ten levels of depth. In looking at the image, it shows what the current market price is, and how many orders are in both the buy and sell markets. You can see that there were 52 orders at 1290.0 and 44 orders at 1291.3. This shows us that there is a nice order flow.
As the time went on with the trade, the market dropped and the take profit order was filled. There were still two contracts left.
To view image click HERE
The Gold market continued to drop, but for example’s sake, let’s say you were distracted and didn’t get out with the wonderful profit shown in the image above. (On the radio show, it’s sometimes hard to focus on the live trade and everything else the host must do for the show!) But it’s okay, because you’ve already taken profit on three contracts. The trade enters into “The Dark Zone”, those last two minutes where market makers usually stop quoting, making it difficult to exit in the two minutes before expiration. You’ve removed your risk on this trade, by taking profit on three of the five contracts. Gold is all over the place and it looks like it will be a battle down to expiration! You think about the goals you use in money management:
1. Remove Risk
2. Make Some Profit
3. See how much profit you can make
You’ve met all three of these goals, and feel at ease as you go into the last 30 seconds of the trade. Had you not met these goals, you would be stuck in an ITM contract, just hoping for the market to come back down.
Market settles at 1290.2. Your trade was close, but it still settled OTM. Your final two contracts lost $19 on 2 contracts for a loss of $38. However, you took profit on 3 contracts making $19 each for a profit of $57. Resulting in an overall profit of $19.
$57 Profit on 3 profitable contracts
-38 on two losing contracts
$19 profit on a $95 investment for a 20% profit in less than an hour!
In addition, the other 2 contracts had the ability to make $162, for an additional 170% potential return.
By using the DOM, you were able to see where the orders were and watch the market follow. You were smart in your trade and followed the saying, “Limit your risk and let profits run.” That is a pretty good guide. By using this simple strategy, you did not have to let a winner become a loser. You still left open the door for the trade to make a very nice return, without keeping your risk exposed in the final minutes.
If you would like to learn more on how to use the DOM and many other valuable tools, go towww.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 rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 7000 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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