Before we get into some basic strategies for trading Touch Brackets, let’s do a brief recap of how the contract is structured and the nature of listing these contracts.
At the beginning of each week, Nadex will list four, unique Touch Brackets on each underlying market. Each set of Touch Brackets is listed in a stair-step, overlapping fashion. As the market moves, a particular bracket may be “touched’ at its floor or ceiling level. When that happens, that contract is immediately expired, and a new contract, covering a range that extends above the ceiling or below the floor that was knocked-out, will be listed.
This listing mechanism should continuously maintain a choice of contracts that offer a beneficial risk/reward profile for both buyers and sellers, in all types of markets. Whether you are looking for a trend to continue or a market reversal, the structure of these contracts and their listing sequence are designed to maximize the number of attractive trading opportunities available to traders in either direction.
Which direction do you choose?
There are literally thousands of ways to analyze any given market to determine direction, or lack of direction. On top of that, there are literally thousands of strategies you can implement, once the expected direction is determined.
Trading is about a lot more than just picking a direction though. One of the most overlooked aspects in trading, no matter what strategy you are using, is to have an exit plan for both profit and loss on every single trade you place.
You can have the greatest strategy in the history of trading, but unless you have a two-sided exit plan for that strategy, it is almost certainly doomed to fail.
Which strategy is right for you?
With a Nadex Touch Bracket, you can utilize a limitless number of strategies to trade. No matter what strategy you implement though, with the floor-to-ceiling structure and the knockout feature of the contract, the Touch Bracket contract effectively builds an exit plan into the contract.
Whether long or short, you always know the maximum risk and the maximum potential reward on any trade and have natural price targets to close out the trade for each side.
Things to consider.
Let’s take a look at some considerations when implementing a strategy to trade Touch Brackets.
Let’s say you’ve analyzed the markets and determined that price will climb higher. If this is the case, you want to be a buyer or go long the contract. Typically, traders looking to buy a Touch Bracket will look for one with a floor close to the indicative index. In most scenarios, two brackets will have a risk to reward profile offering the greatest effective leverage and upside opportunity to buyers, and two brackets offering similar opportunities to sellers.
Having a couple of choices for each market opinion is extremely important and something worth noting. Often, buyers of a contract will look for the Touch Bracket where the indicative underlying market is closest to the floor; however, do not get fooled into thinking this is always the case and understand there are other factors to consider. For example, perhaps the market you are looking at has been moving lower and you believe it is ready to turn around. You may have one bracket with a floor only a handful of ticks below the indicative index and one with a floor a bit farther away. While the bracket with the floor so close will offer a very inexpensive option, it may not be the best option. If the market is too close to the floor, it may not provide enough time for the market to move in your favor before being touched. Or, perhaps, your analysis indicates that there is a level of support below the floor of the contract. In these scenarios, it may be better to take on a bit more risk and give the market some “room to breathe” rather than just blindly choosing the less expensive option.
The concept on the sell side of the market is just the opposite. In this scenario, when you are a seller, you will want to typically look first to the contract with a ceiling that is closest to the indicative index. This is done to trade with the best risk-to-reward profile. That said, there will be situations where you may find it more strategically attractive to take on a bit more risk and give the market some room, rather than simply trading the least expensive bracket.
Whatever your trading style or strategy, it is always advisable when trading a contract that is new to you to spend some time in your demo account placing practice trades. If you have not done so yet, you can get your Nadex demo account here and try out strategies on Nadex Touch Brackets for yourself.
What to read next: