Nadex Trading Strategies (Backtest, Example, and Tips)
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 strategies are?
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. We end the article with backtesting Nadex options.
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:
- The underlying market: This is the market you choose to trade. Nadex offers forex, stock indices, commodities, and events.
- 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.
- 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.
How does Nadex make money?
According to the company itself, they don’t take the other side of the trades. Neither Nadex nor its employees trade on the exchange at all.
That means your order is matched against other customers or one of the many market makers (as is typical on any regulated exchange). They need market makers to make an orderly and fair market and to provide liquidity.
Thus, Nadex makes money the old-fashioned way: they charge commissions.
Is Nadex a safe exchange?
Nadex is regulated by the CFTC (Commodity Futures Trading Commission).
CFTC is not the same as SEC rules. They have different rules and were created by different laws. SEC regulates the security markets, while CFTC regulates the derivatives markets.
If you transfer money to Nadex, where is your capital held? Is it co-mingled with Nadex’s funds?
No, this is what Nadex writes on their website:
Member funds on deposit with Nadex are held in segregated bank accounts at BMO Harris Bank and Fifth Third Bank and are not commingled with Nadex operational funds.
Nadex trading strategies backtest – does it work?
To backtest Nadex strategies is not easy due to data. Thus, we have not managed to make a complete backtest like we usually do in our articles. A backtest requires specific Nadex data.
However, we can make some generalizations.
The Golden Goose in Nadex and binary options doesn’t exist. Options are complicated to trade profitably because of all the factors influencing the price. Binary options are somewhat different, but it doesn’t change our conclusion.
(Volatility and time decay, perhaps the two most important factors, are tricky, and you can be sure market makers are better equipped than you.)
Furthermore, derivatives trading is a zero-sum game. What you gain or lose, someone else must lose or gain. If we include the costs for commissions and slippage, it’s a negative-sum game. In such a market, how are you going to make money? Most traders don’t have a trading plan, and they enter the market with more or less no clue about how to make money.
Research shows that most traders lose money at trading:
Additionally, many option traders don’t do backtesting – perhaps because backtesting options is a bit more complicated than stocks. But if you are not backtesting, how do you determine if you have a positive expectancy or not? We believe it’s a terrible idea to start trading if you don’t know your odds of winning.
Thus, don’t trade on Nadex unless you know what you are doing.
List of trading strategies
We have written over 1000 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.
The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation. The code we have used in this post is included.
The strategies are taken from our landing page of EOD strategies.
The strategies also come with logic in plain English (plain English is for Python trading backtesting).
For a list of the strategies we have made, please click on the green banner:
These strategies must not be misunderstood for the premium strategies that we charge a fee for:
FAQ Nadex
We end the article with a few FAQ about Nadex:
What is Nadex?
Nadex (North American Derivatives Exchange) is a regulated online binary options and spreads trading platform.
Who can trade on Nadex?
Nadex is available to residents of the United States and certain eligible countries.
What instruments are available to trade on Nadex?
Nadex offers binary options and spreads on Forex, Stock Indices, Commodities, and Economic Events.
What fees does Nadex charge?
Nadex charges a fee on trades, which is based on the total contract value and whether the trade is entered or exited before expiration. They also charge an exchange fee, which is based on the volume of the trade.
How is Nadex regulated?
Nadex is regulated by the Commodity Futures Trading Commission (CFTC) as a designated contract market. This provides a level of protection for traders, as the CFTC has strict standards for transparency, fairness, and security.