Spreads Can Offer Limited Risk For Smaller Accounts When Scalping

New traders often like to scalp for several reasons. Scalps are meant to be trades where you can enter, grab a certain number of predetermined ticks, usually not many for the market that is being traded, and then quickly exit. It gives the new trader a sense of instant gratification with less time at risk in the market, but still being able to build their startup trading account. If this is you, or if you just like to scalp, then there is a way to do it with limited max risk and with a smaller account size.

Let yourself be introduced to Nadex spreads. First off, Nadex is a US based, CFTC regulated exchange that can be traded from 49 different countries. Traders are able to enter and exit their trade at any time as long as there is a bid or offer on the other side of their trade. It takes minutes to open an account at Nadex, demo or live. Any funds deposited are in a segregated bank account. Nadex specializes in spreads and binaries. However, in this article, the topic of spreads and what to look for in a spread for scalping purposes will be discussed.

Capped Risk With Spreads

A scalp is usually a short, quick move on an underlying market, so you need a spread that will move with it on a 1:1 basis. Spreads are a range of a market that you can trade, but with the advantage of having a floor and a ceiling, which you cannot lose or win past. This means your risk is capped and defined going into the trade. With Nadex, in order to have a spread that will travel 1:1 with the underlying market, your best choice is to find a spread that is termed NTM or Near The Market. This will usually be the daily or the widest spread available to trade. These spreads are the fast moving spreads with the proximity of the spread’s bid or ask price close to the underlying market price. This normally happens when there is the greatest distance from the bid and ask prices to the floor and the ceiling of the spread i.e., when the bid/offer prices are right in the middle of the spread. As the bid/offer prices move closer to the floor or the ceiling, the bid/offer prices will begin to slow down and eventually move slower than the underlying market price. Therefore, while scalping to make a quick profit and be in and out following the move of the underlying market, you want to trade the NTM daily or the spread with the widest floor to ceiling range with close proximity to the market.

Low risk spreads aren’t necessarily your friend when scalping. They tend to be the ones where price is closer to the floor or ceiling and have what is called a Greek term “low gamma”, meaning they travel slower than the underlying market. This will make it difficult for you to hit your take profit as quickly as you want, if at all.

It is also to your advantage to find Nadex markets with spreads that have tight bid/offer prices. Tight bid/offer prices mean the distance or dollar amount between the bid price and offer price is tight or minimal. The reason is that if you go long the spread and buy at the offer price, in order to exit immediately, you would have to sell at the bid price. Therefore, as soon as you enter your trade you will have a loss equal to the amount between the bid and offer prices. As the market moves in your favor, this will soon change and your trade will begin to profit as the bid and offer prices change. You can see why it is important to have tight bid/offer prices or as minimal amount as possible between the bid and offer prices, in order that the immediate loss taken on will be as minimal as possible. The Nadex Gold and Nasdaq US Tech 100, which is based on E-mini NASDAQ usually have spreads with tight bid/offer prices.

Another important point to know is how does your market tick versus how does that market’s Nadex spread tick. For example, one trader was finding that ticks he made trading his Nadex spread were not consistent with the underlying ticks. Note that on NQ, the market ticks in .25 or quarters, so 10 ticks is 2.5. On Nadex, a contract’s lowest increment tick move is equal to $1. Since Nadex US Tech 100 ticks in .10, a 2.5 tick move on NQ would be a $25 profit on Nadex.

Nadex can offer limited risk and can be traded with smaller account sizes. Yet you can trade multiple contracts as well if you want to increase profit potential.

For more information on how to trade Nadex spreads and binaries as well as futures, forex and CFDs go to www.apexinvesting.com.