If you are new to trading binary options on Nadex, you may have heard of other traders “scalping” their trades. Just what is scalping?
Scalping is a term used for short-term quick trades. It is not held until expiration. The idea is to get in the trade, have the value go up a certain amount and then get out. It is taking advantage of quick, small moves or the time decay. An example of scalping could be buying a binary at the price of 30 and exiting at 40 or 50 or even 60 which would be a 100 percent return of your initial cost. .
At first, you may only make small incremental profits or losses but you are learning and striving for trading consistency. It’s not about that one trade but your total overall trading having a higher percentage of profitable trades over losing trades and trade management.
Trading binary options with shorter duration’s results in the binary pricing to be much more sensitive to the underlying price movement. Obviously when first starting you should start small while you learn trading consistency and remember increasing contract size can make both profits and losses larger.
It is important to focus on the percentages and the returns instead of the dollars. Instead of dwelling on the fact that you only made $30, look at the fact that you risked $30 to make $30. That is a 1:1 risk to reward ratio or a 100 percent return, probably achieved in a matter of minutes.
Here are two examples of scalping 20-minute binary options using NQ (E-mini NASDAQ-100 Futures). The first example was US TECH 100 >4799.5 sold for 79.50. The risk on this trade is only $20.50 on an out of the money (OTM) contract. The second example has more risk. Since it was US TECH 100 >4803.5 sold at 45.75, it is an at the money (ATM) contract. At that time, the market was moving nicely and both trades were up in profit quite quickly. With a little over five minutes left until expiration, both trades were up $38.
With a little under four minutes until expiration, both contracts had continued to gain more profit.
However, the market popped up to 4800.75 at expiration causing the US TECH 100 >4799.5 trade to lose everything, while US TECH 100 >4803.5 remained profitable.
Many traders wonder if they should scalp or hold their trades. Sometimes you may make a little more by holding until expiration, but the market can also go against you making you wish you had taken the profit. Read the charts and technical indicators.
If you see the market is starting to pull back against a profitable trade, realize what you are risking, IE manage your trade. Don’t get greedy and know when to exit. Understand risk/reward ratios and time decay.
Setting a “take profit” order can remove the emotion and the greediness out of your trading. It can help in your risk management. When entering a trade, you already have a plan of having a 1:1 risk reward ratio. Then if you risked 20 on the trade, your plan would be to exit when you are up 20. On the trade above selling a binary entered at 79.50, a take profit order could be set at 59.50 in order to make $20.
Setting a take profit order like this is easy on Nadex. It will automatically exit you out of the trade when the market reaches the set point. Likewise, if you wanted a 2:1 risk reward ratio, you set a take profit when it reaches 39.50 for $40 profit. The image below shows an example of a take profit order, which is simply an exit working order.
If your trade is quite profitable as in the two examples and you’re holding until expiration for a small amount, it is like you’re risking what you’ve “made” for the little bit you might make. In the example, one trade was up 39.75. Holding until expiration is like risking 39.75 to try to make $6 more is not really worth it.
Scalping is good especially if you don’t want to sit in front of your computer for hours waiting for trades. It can be done on Nadex binary options using five-minute, 20-minute, intraday or daily expiration’s. The best way to scalp is to place the trade and immediately set a take profit order. This may help you realize why some of your trades might not have been turning out profitable. Sometimes exiting early and taking whatever profit you have can turn your trading and your trading account around.
Note exchange fees not included