Nadex Strategy

Compatible Brokers for a Nadex trading strategy: Nadex

Nadex is the North American Derivatives Exchange. Based in Chicago, Nadex is a retail-focused online binary options exchange which offers traders the opportunity to trade binary options and spreads on forex, stock index, commodity and now (as of 2015) bitcoin markets.

Offering protection against fraud and market manipulation as well as promoting an open and competitive trading market, Nadex is regulated by the Commodity Futures Trading Commission (CFTC) and provides members with access to a comprehensive trading platform including order entry, market depth, historical data services, cash accounting and position reporting.

Membership is free, and members can trade with as little as a $100 initial deposit.

Trading the bitcoin on Nadex

The bitcoin is a very popular digital (or virtual) currency that has seen increasing use and acceptance over the last five years. Held in a ‘digital wallet’ and sent using the internet, the bitcoin came into prominence in 2013 when its value jumped 10-fold to more than twelve hundred dollars, peaking in market value to more than $2 billion. With an issue limit of 21 million, there are currently approx. 13 million bitcoins in circulation with limited new numbers released each year (until issuance halts when the issue limit is exhausted). Nadex offers daily and weekly bitcoin binary option expirations.

Retail traders are able to get actively involved in trading the bitcoin by taking physical over-the-counter positions or on the derivatives exchange products such as the Tera Bitcoin Price Index. With the bitcoins volatile price generally fluctuating between $200-$400; about a third of its all-time high of $1,200 in 2013, binary options traders are able (from January 2015) to trade the derivative Tera Bitcoin Price Index on the Nadex exchange allowing binary traders to trade price movements of the popular digital currency without the risk of holding actual bitcoins.

Nadex Bitcoin Trading Strategy: Long Straddle

When trading binary options, a trader’s strategy can be used to either increase profit or reduce risk with the primary success factor of any strategy relating directly to executing the strategy at the correct time within the most suitable market conditions. This binary options strategy is able to yield double the profitable returns for traders.

The ‘straddle strategy’ is when a trader pairs both a Call and a Put trade on the same asset. That is, a trader straddles the asset on both the high and low price creating a cushioned position and potentially doubles the success on the trade at the time of its expiry. Traders should use a ‘long straddle’ in volatile market conditions and a ‘short straddle’ in flatter (or sideways) market conditions.
In reference to the bitcoin, which is capable of volatility in the vicinity of ten times change in price (10 x price) over a relatively short term period and more recently up to 20% increases in price, a long straddle is considered an ideal strategy for use on the Nadex exchange.

To trade a long straddle strategy, a call trade is placed at the bottom of a trend. That is, as the price of the asset moves down to its previous lowest rate or support area, the call trade is placed. Then, once price reverses, a put trade is placed at the top of the trend with the same expiry time as the call trade. In this way, a trader is positioned on both sides of the trade. When the trade expires, a trader will either be in-the-money on both of the trades or only on one.

In the bitcoin trading example, an uptrend of price is observed which eventually reaches an unsustainable high. When charted with the Relative Strength Index (RSI), which as a momentum indicator measures the speed and change of price movements, price extremes (and turning points) are confirmed at overbought (70) and oversold (30 ) levels.

When RSI is above 70 and overbought, a bearish reversal is signaled and a put trade is signal. As anticipated by the RSI, the bitcoin price action did reverse and started moving quickly downwards (a display of volatility).

Once RSI falls below 30, a clear signal is delivered stating that price is now oversold and a bullish reversal is anticipated. A call trade is placed, and as per the long straddle strategy, the same expiry time is used as the earlier traded put trade.

Because Nadex binary options traders are not concerned with how much an asset moves in price, only the true or false price direction, the Nadex long straddle strategy against the bitcoin using a weekly expiry could result in either both trades expiring in-the-money, and therefore doubling a traders profits or just one trade, either the call or the put trade expiring in-the-money.

Trader Note

Responsible money management ensures that the losses don’t mitigate the profits.