Several people have asked, “Why do you love Nadex Binary Options?“. Before I answer that question, let’s look at why a lot of traders fail.
- They are undercapitalized. What does this mean? Most traders, especially with the downturn of the economy in the last few years, only have $5-15K to start their accounts. Yet, they need to make enough money to support themselves and their families. Each week is going to present at least 2 to 3 days of sideways movement. This sideways movement will cost them money (losing trades). If they start with $5,000, and they have five consecutive losing days, they could actually be down 30% in their account or $1,500. That’s risking only $100 per trade, three trades per day.
- This leads to fear – fear of losing more money. They know and understand they need to increase their risk to reward per trade to overcome the losing but they have a very limited capital supply. They begin to question every entry. Typically the way it goes, they will not take the first or second or even third setup. Then finally, after seeing the market move in their direction and calculating how much they “would have” made, they enter only to be stopped out, again.
- At this point, they go out and find new indicators and a new methodology. It can’t be them – it has to be what they are using. They follow the new methodology and still lose more money. They pull more money out of their savings, justify the action by saying it was the first set of indicators that lost the money. They may increase their account and make it back to breakeven now. Of course, the winning stalls and they begin to lose again.
- Usually one of two things happen next. They decide it is their stops — they are just too tight so they enlarge the stops — resulting in even bigger losses. They probably will end up with a margin call and be stopped out just before the trade of the century comes in. Or, they simple sit and stare at the screen, never being able to pull the trigger. They feel like losers. They want to make this work so bad but they simply cannot pull the trigger. Words cannot describe the depth of despair they feel. They question their ability to trade, they feel like losers, they question how they could have been that stupid. The emotional anguish is extreme.
- Usually, by this point, they take a break. They have to go out and find some type of job but they are still watching the markets or will come back to them. They have been “bitten” by the trading bug and nothing compares to trading. They remember the highs of making money quickly in the market and it is really hard to get excited over any other type of work.
- They save up the money again, and come back determined to make it work. They have increased their knowledge of the markets, price action, and they are convinced this time it will be different. And, the first couple of trades are awesome. They double their account. Oh, yeah, they know what they are doing this time. Till the market hits and hits hard. They lose a couple of trades and they are angry. They are not going to let the market take their hard earned money. What happens? The markets take all the gains and then some. Again, the desperation returns.
Typically this cycle repeats itself over and over again. Breaking the cycle is one of the hardest obstacles in a trader’s path.
Why do you love Nadex Binary Options?
Now, let’s look at the differences I have seen with Nadex binary options.
- There are no margin calls. The risk is paid up front (the strike price). This means that a trader cannot move his stop further away from price or have the markets jump the stop (which happens frequently during market volatility).
- Losses are capped going into the trade. This means when the trader enters the trade, his total loss is paid up front. Because the loss is paid up front – the trader has more control and realization of what they can lose – before ever placing the trade. For example, in the AUD/USD image, the maximum loss on the Offer side is $85.75 and the maximum risk on the Bid side is $15 ($100 – $85). So if the trader buys the Binary Option for the AUDUSD, $85.75 is immediately deducted from his account. In this case, the Nadex Binary Options are worth $100 at expiration, the profit potential is only $14.25. If the trader opted to sell the binary option, $15 would be deducted from his account. In this case, the Options are worth $0 at expiration and the profit potential would be $85. However, the probabilities are greater on the buy side and less on the sell side (I will address this in another article).
- Profits are also capped. The order entry on every Nadex Binary Option is shows the maximum Loss and Profit on every trade. This encourages the trader to think out his trade. In other words, “My risk is $23.50 and my potential reward is a maximum of $76.50. or a 1:3 risk to reward ratio.” Instead of dreaming about the hundreds of dollars he can make on the trade, the maximum on each side is known upfront. Because this is shown upfront, it encourages the “think through” the trade process before entry. And, it’s realistic. This is intraday trading, and, daytraders typically do not take thousands of dollars in profit at a time. Instead, daytraders take small profits throughout the day. Look at a successful trader’s equity graph and chances are the equity graph slowly increases. Traders make money, give money back, make more money, give some back, make more money, give some back. The key to an equity graph of that nature is limiting the losses and Nadex does exactly that — it limits the losses upfront.
- Since Nadex offers the capped risk and each option contract has a maximum payout of $100, being undercapitalized is less of an issue. The same $5,000 account in Nadex, with proper money management techniques and sensible trading guidelines, allows for drawdowns. For example, this equity graph shows the hypothetical results after 700 trades, using a $50 Max Loss and $50 Max Profit, a 52% winning percentage, and a $1.80 round trip commission for each trade. The red line shows the drawdown and the blue line shows the Profit/Losses. The first few trades are rocky and then it evens out. Profits go up, back down, back up, back down, but steadily the account is increasing and there is sufficient money in the account to withstand the drawdown (roughly about $800). *Please see disclaimer below because these are hypothetical results using a random trade generator.*
- Since the trader is not undercapitalized, his fears tend to lessen. The trader is more apt to concentrate on the charts and the indicators instead of the DOM (profit/loss window). He feels more in control of his trade because he cannot be stopped out and he stops cannot be jumped. A loss of $50 is much easier to take than a loss of $300 – mentally and financially.
- And, sideways markets are not an issue when trading Nadex Binary Options. In fact, I love markets that are not moving now because they are much easier to trade. For example, I took a Nadex Binary Options trade on the USDJPY yesterday (6/4/14). This is the first trade I have taken in the USDJPY in a very long time because the volatility had decreased substantially in the last few months. Price was at the Average True Range Stop (ATR), with no buying volume (my standard entry). I enter a short position believing that price would not go above 102.60. Price moved down five ticks from my entry and stayed below 102.60. As you can see, I entered the trade at 5:03 am and the option expired at 6am (EDT). Fifty-seven minutes from entry and price moved five ticks. Yet, the trade netted $89 on two contracts, on exit, after commissions.
Now let’s compare the binary options with with the Futures or Forex side.
First, on the spot forex side, minimum pip spread for the trade would have been at least 1 pip each side or $40 roundtrip (trading two contracts as I did on the option). The margin requirement would be $2,000. The best case scenario would be that I exited at the low, 102.56 (after the pip spread 8 ticks of profit or $80) and my worst case scenario would be a loss of at least twelve ticks or $120 (pip spread of 1 tick going in and one tick on exit plus a 4 tick stop with two contracts).
On the futures side, the typical margin requirement for the Japanese Yen is $500 per contract ($1,000 for two) and I would pay $10 minimum round trip for two contracts, and my best case scenario would be 8 ticks of profit (4 ticks for each contract) minus commission ($70) or my worst case would be losing five ticks per contract plus commission ($110).
Which trade actually gave the highest percentage gain? The Nadex Binary Option side. To enter the option with two contracts was $108 ($54 multiplied by 2). The profit was $89 after commissions or a net gain of 82%. On the Spot Forex side, it took $2,000 to make a 4% gain. On the Futures side, it took $1,000 to make a 7% gain.
One could argue that the Nadex Binary Option was worse if the trade lost money. Theoretically, it may seem that way. However, that is the maximum loss the trade could incur. On the Futures and Spot Forex side, although you have a stop set, theoretically you can lose more. For example, if a sudden surge of volatility appeared, price can jump over the stop and keep going thereby exposing the trader to an even higher loss and it does happen. Yesterday the G7 meetings were being held in Brussels and, although the meetings are closed to the press, they come out afterwards and their comments can cause extreme volatility. Typically, I do not trade during the G7 meetings for this reason. With Nadex Binary Options, I can with the confidence that my risk is capped.
And, unlike other options, Nadex Binaries are available 24 hours a day, Sunday – Friday, except for 5pm – 6pm EDT. This means that traders can work their day jobs and still trade during the Asian session (opens at 8pm EDT during the summer) or early morning (5 am EDT).
In summary, while there are other advantages, Nadex Binary Options offers traders the ability to trade with smaller accounts, limit their risk, and avoid the emotional pitfalls that actually cause traders to fail and that is why I love them.