What are Nadex Spreads?

In this lesson
  • What are floor and ceiling price levels and how do they limit both losses and profits?
  • How do Nadex spreads let you limit losses without getting stopped out?
  • What is the variable payout structure of spreads and how is it different from the all-or-nothing outcome of binary options?

Buy time to be right and protection against being wrong. 

Nadex spreads let you trade a price range with a floor on losses and ceiling on profits. 

Among the oldest and most trusted rules in trading are “Buy low, sell high,” and “The trend is your friend.” They’re still as true as ever and if you can step back from all the fancy talk about trading systems and indicators, you recognize that in the end, the only way to profit is to move with the price action and get back more when you sell than what you paid when you bought.

The tricky part about spotting trends, though, is that they aren’t smooth lines. Prices move in waves, between key price levels, often up and down several times, before breaking to new highs or dropping to new lows. Traders with deep pockets can ride out those choppy waves and some skillful traders can even profit from them with quick long and short trades. But many traders just get chopped up.

Even when you’re right, you can get stopped out of a trade by one quick price spike, only to see the market come back in your direction. It is frustrating, to say the least, to watch the market prove you right after you get tossed back onto the sidelines, not making money from it.

Limit your losses without a stop loss

With Nadex spreads, you get the risk protection of a stop loss, without the threat of being taken out of your position before it goes your way.

If the underlying market price goes below the floor of the spread’s price range, the spread position does not continue losing money. There is a maximum loss built into the spread, which you know up front when you place the trade.

This way, instead of focusing on how much of a loss you are willing or able to endure while waiting for the market to (maybe) turn around, you can focus on what you should be focused on: analyzing the market’s price action and adjusting or sticking to your strategy.

Different by design

Nadex spreads are designed to help you avoid getting chopped up by those sudden price moves. You can stay in the trade without getting stopped out and give it time to go in your direction.

In exchange for this protection, you give up the possibility of “unlimited profit potential” and aim for a specific profit target. To use a baseball metaphor, instead of swinging for a home run every time, you go for the base hit.

A Nadex spread lets you trade a range of price action between two levels. You can trade both up and down markets, taking short positions as easily as long positions. This gives you the flexibility to profit even in falling markets. At the same time, you don’t expose yourself to unlimited risk if the market goes in the opposite direction.

You can trade a trending market, but ride out the choppiness, let the trend move in your direction, and have more opportunities to exit on the right side of the “Buy low, sell high” rule.

You don’t have to expose yourself to unlimited risk. Neither do you have to worry about being stopped out.

Stay in the trade until you decide to exit

Because the spread has a built-in floor that limits your maximum loss, you don’t use a stop loss. This means, as you might guess, that you cannot get stopped out.

Instead, you can stay in the trade if you choose to, and wait for the market to turn back in your direction. Or if you decide that the market won’t turn back around, you can exit with the maximum loss you prepared for when you entered.

The design of the spread buys you more time to make that decision. Instead of getting stopped out by a sudden big move, you remain in the trade. You may be at your maximum loss, but you knew that worst-case scenario up front. In this way, you’re prepared for the worst and you have more time to capitalize on whatever the best case scenario might be before expiration.

Variable payout, not all-or-nothing

Spreads move differently than binary options. A binary option and its underlying market don’t move in sync. Sometimes the options price will move more slowly. In other cases, a small move in the underlying will cause the option’s price to jump drastically.

Nadex spreads, by contrast, may move more closely with the underlying market except near the floor and ceiling, where the spread reaches its limits. In the middle of the spread range, however, when the price of the underlying market moves up one tick, the spread price moves up a similar amount.

Nadex spreads are an innovative new way to trade with unique benefits. They move in a linear fashion, in close correlation with the underlying market, offering similar trends and price action. But their built-in floor and ceiling give you built-in risk protection that, unlike ordinary stop-loss orders, gives you staying power until expiration. You can never get stopped out—exit when you want or wait until expiration. That expiration settlement value is derived from the actual underlying indicative market price at that time. 

 

At this point you should understand:
  • How and why Nadex spreads use a floor and ceiling to limit both losses and profits
  • How Nadex spreads let you limit losses without getting stopped out
  • How Nadex spreads move in a more linear fashion with the underlying market and have a variable payout

 

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