Nadex Trading Strategies (Backtest And Example)

Last Updated on October 19, 2022 by Oddmund Groette

There are different ways to participate in the financial markets, and some of them have been structured to involve just predicting the market direction. One such easy but risky trading method is Nadex trading. Wondering what Nadex trading is?

Nadex trading is a form of derivative trading that allows traders to make short-term bets in forex, stock indices, and the commodity market. Nadex is the short form for the Northern American Derivatives Exchange, which is a CFTC-regulated exchange where U.S. and international retail traders can legally trade binary options, call spreads, and other short-term derivative contracts.

In this post, we take a look at Nadex trading.

What is Nadex?

Nadex is the short form for Northern American Derivatives Exchange. Formerly known as HedgeStreet, Nadex is a US-based and CFTC-regulated exchange where U.S. and international members can legally trade binary options and spreads. The exchange offers retail trading of binary options and spreads on the most heavily traded forex, commodities, and stock indices markets. It allows customers to also bet on the effects of economic events, such as the Fed’s funds rate, weekly jobless claims, and non-farm payroll.

Nadex was launched in 2004 as Hedge Street to offer an electronic marketplace where retail traders can trade very short-term financial derivatives. Regulated in the US by the Commodity Futures Trading Commission (CFTC), HedgeStreet was considered a pioneer in event futures. In 2007, UK-based IG Group agreed to purchase HedgeStreet, Inc. for $6 million and began restructuring the exchange, its technology, and its products. In 2009, it renamed the exchange the North American Derivatives ExchangeTM (Nadex), and it began to offer binary options similar to those already available on IG’s platform.

In December 2021, Singapore-based Crypto.com announced its intention to acquire Nadex and the Small Exchange from IG Group. The purchase was completed in March 2022.

What can you trade on Nadex?

As we stated earlier, Nadex offers short-term derivative trading on stock indices, forex markets, commodities, and cryptocurrency, as well as macroeconomic events. The derivative contracts are structured into three main types of products:

  • Binary options
  • Knock-outs
  • Call Spread

Binary options

A binary option is a derivative financial product that turns every trade into a simple yes or no question, where you state whether a market is likely to be above a certain price, at a certain time. If you think it will be, you buy. If you think it won’t be, you sell. It is considered ‘binary’ because there are only two possible outcomes at expiration: you either make a predefined profit, or you lose the money you bet with. It offers defined risk and clear outcomes — you know exactly how much you could lose if the markets move against you, and if the market moves in your favor, you know the exact size of your potential profit.

With a binary option contract, you are speculating on the market rather than buying a share of the underlying market. As with other options contracts, a binary option contract has three key elements:

  1. The underlying market: This is the market you choose to trade. Nadex offers forex, stock indices, commodities, and events.
  2. The strike price: This is the actual price level you are betting on. The strike price is central to the binary option decision-making process – to place a trade, you must decide if you think the underlying market will be above or below the strike.
  3. The expiration date and time: This is the duration of the binary option contract. You can trade binary options contracts lasting for up to one week, with a duration as short as five minutes.

Trading binary options with Nadex is intended to be fast-paced and exciting. Contracts are available day and night. Although it can be exciting and easy to trade by traders of all experience levels, it not easily profitable, as it is more like the casinos where you bet on odds.

Knock-outs

Also known as Touch Bracket contracts, Knock-outs are financial derivative products that are designed to offer trading opportunities with built-in profit targets and risk management. The contract has a floor and a ceiling to protect against big losses or lock in profits – as soon as one of these is hit by the indicative price, the knock-out contract expires.

It offers clear profit targets so traders can plan their strategies and pick knock-out contracts that work for them. The contracts are structured to provide a simple entry point to the most popular markets, with a built-in exit strategy on each trade. Traders can choose to buy or sell a contract depending on which way they think the market will go.

The risk is limited by the floor price, while the profit is specified by the ceiling price. And these set the knock-out contracts apart from other types of financial products. Here is how they work:

  • When going long, the floor is the level that prevents you from incurring major losses, but when going short, it is the level that shows the maximum profit potential.
  • When going long, the ceiling is the take profit that prevents you from holding onto a trade for too long and risking the trend reversing. When going short, the ceiling is your level of maximum risk.

Nadex lists four unique knock-out contracts in forex major pairs and the four major US stock indices each week. If the floor or ceiling is hit at any time during the week, the contract expires and a new one will be created at a different level, providing continuous trading opportunities.

Call Spread

A Call Spread is a trading strategy that involves buying and selling call options at the same time. The contract is based on a call spread strategy but has been modified to simplify the process and remove drawbacks, making them better suited to individual traders. Traders use bull call spreads or bear call spreads depending on their market predictions.

The call spread contacts have a built-in floor and ceiling, representing the total potential value of the trade and providing defined maximum risk and profit. Instead of choosing from countless potential strike levels and price points, Nadex call spreads are listed with a predetermined range and total contract value. This simplifies the process, as there is only one price to consider when making trading decisions.

Some of the unique features of Nadex call spread contracts are as follows:

  • The contract duration ranges from two hours to one week in length, so you can select the time value that suits you.
  • There are both small contract sizes to meet retail traders’ needs and adequate liquidity for traders with larger account sizes.
  • There is no pattern day trader rule — you can trade as often as you want, 23 hours a day, between Sunday and Friday.

What is Nadex trading?

Nadex trading is a form of derivative trading that allows traders to make short-term bets in forex, stock indices, and the commodity market. The contacts are short-term, ranging from five minutes to some days or up to a week, and are structured in a way that the traders make bets about the direction of the market or where the price could get to during the period of the contract.

At Nadex, traders can bet on different financial markets, such as stock indices, forex markets, commodities, and cryptocurrency, as well as macroeconomic events, like the Fed funds rate and weekly jobless claims. Trading hours start at 6 p.m. ET on Sunday and run overnight until 5 p.m. on Monday through Thursday, and on Friday, it ends at 4:15 p.m. ET. Each trading day, trading is paused from 5:00 p.m. ET to 6:00 p.m. ET for exchange maintenance and settling contracts.

One of the most popular derivative contracts on Nadex is the binary options, which are based on a simple yes or no proposition: With this contract, a trader bets whether an underlying asset will be above or below a certain price at a certain time. Binary options have well-defined profit and loss limitations that are known in advance, which make them attractive to a variety of traders and newcomers to the financial markets.

Nadex binary options are priced between $0 and $100, so you can decide how much capital you can risk. Here is how it works:

“If your trade is successful, you receive a $100 payout, so your profit will be $100 minus the money you paid to open the trade. If your trade isn’t successful, you don’t receive a payout. This means you lost your capital, but nothing else, because your risk is capped. If you find that you want to exit a contract early before it expires, you can place another order to close your position, limiting losses or locking in profits.”

Is Nadex trading worth it?

No, options are extremely difficult to trade; it is a zero-sum game. And binary options are even worse. Although they may sound simple, with only a yes or no kind of trading, binary options are more like a casino where you bet on odds. it is difficult to be profitable consistently. You are better off investing in passive index funds, as those grow with the market and the economy.

Nadex trading strategies – backtest

A backtest of a Nadex trading strategy is coming shortly.

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