Trading with Spreads
Nadex offers spread trades for their clients. This is a different way of trading than the binary options that you might be used to, and as such, there is a certain amount of curiosity that traders often have when dealing with them. Some traders jump in head first and lose their money trading on spreads because they do not have the knowledge or the expertise to be successful with them. Many other traders avoid spread trades altogether because they are a different type of trade than what they’re used to.
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You don’t need to fit into either of these extremes. Instead, we urge you to learn what these trades are and practice with them in a demo account. This way, you can have some level of expertise with them, and when the right situations pop up, you will be more likely to trade these instruments with success. Here, we will go over the basics that you will need to know before you get started with Nadex spreads.
Nadex vs. Forex
First, let’s get an important distinction out of the way. If you have experience with Forex trading, you may think that you’ve already gained mastery over the concept of spreads. However, the type of spread that is present at Nadex is a very different thing than what you will find at a Forex broker. When you are Forex trading, you will find two different prices for an asset: the bid and the ask. When you buy a currency pair, the price will be higher than the price that you can immediately sell that pair at. In order to make a profit, you need to wait until the price moves enough that this difference is overcome.
At Nadex, spreads are set up in a very different manner. Here, you are given a range of prices—a spread—of where an asset will finish in price. This establishes a floor for how much you can possibly lose, and a ceiling for how much you could earn if things go well for you. This range gives you protection against losses, which is a beneficial risk management move, and it gives you a cap on how much you can earn in exchange. Let’s say that you are focusing on the GBP/USD currency pair, and the range 1.1000 to 1.1250 is given. Even if the price of this pair drops below 1.1000, this will be the price you are given. And vice versa for the upper end of this spread.
Now, you establish a contract. Let’s say you think the price will drop for this pair. You create a contract where you are selling the pair. If the price does drop, then you will earn the difference between what the strike price was and what the expiry price was, multiplied by your risk and the leverage that you assumed. You can also buy existing contracts from other traders. What you do is based upon the analysis that you conduct and where you think the asset’s price is headed. In this respect, it is similar to a traditional binary option. In other ways, it is very different.
Nadex Spread Strategy
You have probably realized by now that Nadex spreads require a very different approach than if you were to stick with the traditional binary options market or trade in the Forex marketplace.
How do you develop a working strategy trading spreads at Nadex? First, learn the material. Go over their tutorials so that you are familiar with the process of executing trades in real time. Practice with the free demo account so that you are able to make trades quickly and without making a mistake. These are the very first things you should do on any trading platform, whether it’s a broker or an exchange, and regardless of the trading instruments that you will be using. You need to ensure that you can flawlessly navigate the websites you’ll use, and make trades without error, all without spending too much mental energy remembering which buttons to push and where they are located. This takes time and practice, but it’s a must if you want to give yourself the best chances you possibly can.
Next, consideration needs to be given to risk. If you’re using leverage, are you using too much? If your trade turned out to be a worst case scenario, are you okay with losing that amount of money? If no, then you need to make some changes so you are not overextending yourself and risking money that you shouldn’t be risking.
Finally, evaluate whether your chances of success mathematically outweigh your chances of profiting. If you can see a trade going in either direction, but you stand to lose slightly more than you could earn, basic math says that given enough scenarios of this occurring, you will lose money. Situations that are not mathematically friendly to you should be avoided. These math skills will be something that you will want to develop if you do not already have a firm grasp on how these things work. The Learning Center at Nadex can get you pointed in the right direction for where to get started here. There are also plenty of resources out there on the web that can help you learn some of the finer points of the math needed to evaluate yourself as a binary options or spread trader.
Nadex Spreads Conclusion
There are literally an endless number of strategies out there for trading Nadex spreads. Find a few that make sense to you, learn them as well as you can, and practice them over and over again. That might not sound too glamourous, but this is one of the most reliable methods of making money trading here that you will find. And because this doesn’t involve an automated trading method, and because it doesn’t have you blindly following a set of rules, you are more likely to gain a deep understanding of how spreads work, and this knowledge can be applied to different situations. Hopefully, this will help you to be a profitable spread trader.
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