Strengths Of Spreads For Trading News

Right now, there are several good reasons to trade spreads over futures or binaries when trading the news. Spreads can be used in strategies, which can be entered before the news is released, making trading early morning news more convenient. Unlike futures, whose risk is unlimited, spreads have capped defined risk. Binaries trade on true or false statement about where the market will be at settlement, which makes it all or nothing for profit. Spreads, on the other hand, at exit or settlement are based on the difference between the entry and the exit. The floor and ceiling simply cap the risk of the spread.

These facts make spreads ideal strategies for trading news events. Take the upcoming UK Consumer Price Index news being released Tuesday, December 13, at 4:30 AM ET. An Iron Condor spread strategy trading Nadex GBP/USD spreads could work well for this news. The trade can be entered as early as 11:00 PM ET the night before, way ahead of the news release.

Based on previous average market moves to this news, it was found that the market tends to react and make a move, but then pulls back. Iron Condors are good at profiting on that kind of market movement with the way the two spreads of the Iron Condor are entered. One spread is bought below where the market is trading and one spread is bought above where the market is trading. The ceiling of the bought spread should meet the floor of the bought spread and be where the market is trading at the time. Each spread can have a profit potential of approximately $15 - $19 for a combined profit potential of $35.

Stops To Tighten The Already Capped Risk

Once the market moves and then pulls back, the closer it gets to returning to center between the two spreads, the greater the profit. Max profit is found in the center between the spreads. As it makes its move farther in one direction, that spread can profit. Depending on how far the market moves in one direction, that will determine the loss taken on in the spread that the market is going against. When the market pulls back but starts to go in the other spread’s direction, then that spread will start to show profit.

What if the market takes off and doesn’t come back? Stops are for this purpose. The risk is always limited and capped at the floor and ceiling, depending on the direction of the spread. The stops will keep the risk even tighter and realistic. For this trade, stops should be placed 35 pips above and below where the market was at entry. This is where the trade would have a 1:1 risk reward ratio. The market can move as far as 35 pips up or down and settle anywhere in between those points to make some profit. Those are the breakeven points and between them is the profit zone.

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