Nadex spreads let you buy time to be right and protection against being wrong
Spreads Eliminate Some Common Problems
A Nadex spread lets you trade movements between two price levels, in either direction. It’s designed to avoid several negatives:
- You don’t want to have to pick tops and bottoms
- You don’t want to get punished if your timing is a little off
- You don’t want to face unlimited risk
- You don’t want to get stopped out only to watch the market turn around
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Spreads Offer Unique Opportunities
Nadex Spreads help you limit or avoid all of these risks. Spreads let you:
- Buy protection against being wrong
- Buy time to be right
- Trade bullish or bearish bias with equal ease
When you can trade in both directions, long and short, you have in a sense doubled the opportunities available to you.
And when you can stay in a trade with a cap on your possible losses, you give the market time to turn back around and move in your favor. Nadex spreads give you staying power that conventional stop-loss orders don't.
Limited Risk and Reward
With Nadex spreads, you know your maximum potential loss and profit at the start of the trade. Limiting loss is obviously a good thing. But what about limited profit?
In theory, shares of a stock like Apple could go up indefinitely. Buying and holding can be profitable, but Nadex spreads allow you to take a different strategy with a more definite time frame.
With a spread, you give up the possibility of “unlimited” profit potential in exchange for protection against unlimited losses. The price moves in close correlation with the underlying market, with protection built in.
Close Correlation with the Underlying Market
When the underlying market (the EUR/USD exchange rate, gold futures, or the S&P 500 index) moves up or down, the spread price follows it closely. This is one of the differences between spreads and binary options.
“Between the floor and ceiling” means that if the underlying market price moves below the floor price, the spread’s value will drop to the floor and no further. It also means that the spread’s value can only go as high as the ceiling.
If you are a buyer and the market rallies, you may only get the maximum value of the spread. Of course, you can then initiate a new trade at higher prices.
The short-term nature of the spread contract means that you can trade quick movements, get out, then plan your next setup, all within minutes or hours.
Let’s Put It All Together With an Example
A typical spread might have a name like this:
EUR/USD 1.1000-1.1250 (3PM)
You are trading the spot exchange rate between the euro and the US dollar. The floor is 1.1000 and the ceiling is 1.1250, so the spread’s value will move when the EUR/USD rate moves between 1.1000 and 1.1250. It won't go outside that range.
To open a position, you buy at the offer price or sell at the bid. Or place an order for the price you want and wait for the market to come to you. At expiration, it will settle in one of three ways:
- If the EUR/USD is within the range between 1.1000 and 1.1250 at expiration, the spread price will settle based on the price of the underlying market
- If the EUR/USD is lower than 1.1000, the spread will be 1.1000
- If the EUR/USD is higher than 1.1250, the spread will be 1.1250
If you want to exit before expiration, you sell at the bid price if you were a buyer, or buy it back at the offer if you sold. If the market is outside the range, you will most likely get the floor or ceiling price.
How do we calculate the prices for the Nadex indicative markets?
- Take the last 25 trade prices in the underlying market
- Remove the highest 5 prices and the lowest 5 prices
- Take the arithmetic average of the remaining 15 prices and round to one decimal point past the point of precision of the underlying market (with the exception of Wall Street 30, which is rounded to the same point as the underlying market)
- Take the last 10 midpoint prices in the underlying market
- Remove the highest 3 prices and the lowest 3 prices
- Take the arithmetic average of the remaining 4 prices and round to one decimal point past the point of precision of the underlying market
The market pricing for Indices and Commodities comes from a data feed from Reuters. If Reuters is unavailable, we may obtain data through Bloomberg or another appropriate provider. The market pricing for Forex contracts comes from a proprietary data feed (“NadexFX”) comprised of quotes from 12 well-known banking institutions. If NadexFX is unavailable, we may obtain data through Bloomberg or another appropriate provider. For more specific details please see the individual contract in the Nadex Rules.