Last Wednesday, the Bank of Canada announced it was keeping its interest rates steady at one percent.
The Canadian central bank's staying with the status quo was expected, as they have not changed the rate since 2010.
Even with the rate change being kept the same other statements caused a massive move in the USD/CAD forex pair.
What is Forex TIP: Forex, also known as FX and Foreign Exchange, is buying one currency in exchange for another. For example, if you travel from the U.S. to Canada you might go to the foreign exchange booth at the airport and provide them U.S. dollars. They'll then provide you the equivalent value at that time in Canadian dollars.
With the USD/CAD currently at 1.10 -- for every $1.00 in US dollars you gave them they would give you $1.10 in Canadian dollars. These values fluctuate and you can trade these nearly every single day of the week. And you don't have the large $25,000 account size requirement to do shorter term day trades like you do in stocks.
Speculators try to grab some of the move that is expected right after the announcement is made. Others sit back and let the news come out and be over with before they get back into the markets.
The issue is, you and the speculators honestly have no idea which way the market will move when the Canadian rate statement is announced. But what you can know is how far the USD/CAD moves on average when this statement comes out right after the release. Using the weekly economic outlook calendar you would have known that the projected move on USD/CAD when the Bank of Canada makes its rate statement is 85 pips. (See Economic Outlook HERE)
What is a Pip TIP: (A pip is a minimum increment move; i.e., on stock a "cent" is a minimum increment move. So one could say a pip on a stock is .01. It is simply the last digit the trading instrument is quoted in. The term pip is used on forex, and as you are dealing with multiple currency pairs it's easier to say "pip" than "cent aussie," "Canadian cent," etc... On a stock .01 is worth 1 cent. So when a stock movs .01 the value goes up or down by 1 cent. On Nadex spreads a pip is worth $1.00 no matter what instrument it is. So when the forex pair moves by .0001 then the value goes up or down by $1.00. This is a benefit in the North American Derivatives Exchange, or Nadex, as you don't have to deal with currency conversion at all when trading Forex).
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With a straddle you don't have to sit aside and watch the move, you don't have to pick direction, you just need to have an expected movement at a specified time in either direction.
So instead of trying to be a guru and pick direction, or sitting aside and missing out on the move, you could also a simple straddle using Nadex spreads. When you do a straddle so long as the market moves far enough in either direction you could have profited on the trade doing a Nadex Straddle.
The North American Derivatives Exchange is based out of Chicago and is regulated by the U.S. Futures Trading Commission (CFTC). Nadex allows traders to trade binaries and spreads on foreign exchange (forex) markets, U.S. and International Stock Indices, and Commodities like gold and oil.
Leverage And Low Risk Tip: Trading forex allows you to trade with large leverage, depending on the broker of up to 50:1. So you have $50 of buying power leverage of $50 for every $1.00 put up to trade. Unfortunately, leverage can cut both ways -- but with Nadex the leverage can not only be 50:1 but even much higher, and the leverage works for you but not against you. The reason is, with Nadex all risk is capped and your risk never increases from the initial risk, no matter how far the market moves against you.
So How Do You Do A Straddle On Nadex?
At approximately 8 AM ET the USD/CAD was trading right around 1.0960. You could have then entered a 3 PM expiring straddle trade.
1) Buy The Upper Spread
Bought the upper 1.0960 to 1.1160 3 PM ET spread at around 8 AM ET for a price of 1.0980.
Risk is calculated on a bought spread as simply the difference between where you buy and the floor (lower strike of the spread) The floor is 1.0960 though bought price is 1.0980 - this makes the risk .0020 or 20 pips every pip is worth $1.00 so your risk is $20 Reward is calculated on a bought spread as simply the difference between the ceiling (higher strike of the spread) and the price you buy the spread. The ceiling on this spread is 1.1160 and you bought at 1.0980 - this makes the max reward potential .0180 or 180 pips with every pip worth a dollar that is a profit potential of $180.2) Sell The Lower Spread
Sold the lower 1.0760-1.0960 3 PM ET spread at around 8 AM ET for a price of 1.0950
Risk is calculated on a sold spread as simply the difference between the ceiling (upper strike of the spread) and where you sell the spread. The ceiling was 1.0960 and you sold at 1.0950 this makes the risk .0010 or 10 pips every pip is worth $1.00 so your risk is $10. Reward is calculated on a sold spread as simply the difference between where you sold the spread and the floor (lower of the spread) The floor on this spread is 1.0760 and you sold at 1.0950 - this makes the max reward potential .0190 or 190 pips with every pip worth a dollar that is a profit potential of $190.3) Calculate the Max Risk
Combined the max risk on the trade is $30 ($20 on the long and $10 on the short side). And there is plenty of profit potential for a 1-to-1 or higher profit on the trade.
4) Calculate A 1 to 1 Profit Ratio
For a 1-to-1 take profit you would simply take the total risk, plus the risk on either side, to know where to take profit for 1-to-1. Pretend your total risk is $30, plus $10 risk on the short side. You need to make $40 on the bought side for a 1-to-1, as you are counting on the short side loosing the $10, netting you a $30 profit.
You can also look at that in reverse; saying the total risk is $30 plus $20 risk on the long side. You need to make $40 on the sold side for a 1-to-1, as you are counting on the long side losing the $20, netting you a $30 profit. Now you need to add 40 pips to the price you bought the upper spread at and set that as your take profit ,to sell it to exit. Bt $300.
For Example
Add 40 pips to the price you bought the upper spread at and set that as your take profit to sell it to exit. Bought the 1.0960 to 1.1160 3 PM ET at 1.0980 once filled set a take profit to sell it back at 1.1020.
Likewise, you need to subtract 50 pips for the price on the one you sold and set a order to take profit to buy it back at as your take profit to exit. Sold the 1.0760-1.0960 3 PM ET at 1.950. Once filled set a take profit to buy it back at 1.0900.
(Note: we are just talking one straddle at $30 -- you could do 1, 10, 100 etc... to multiply out the value, risk, and profit potential)
5) Before Entering Check Your Range
The range on the average move is 85 pips so add 85 pips to where the market is and subtract 85 pips from where the market is and ensure your take profits are within the expected range.
For Example:
Market USD/CAD at approx 1.0962 at 8 AM ET.
85 pips above this is 1.1047 (this is higher than our take profit on the long side of 1.1020 so the long trade is also within our range).
85 pips below this price is 1.0877 (this is lower than our take profit of 1.0900 on the short trade so it is within the range.
So how did the trade work out?
In the chart below the trade was entered, the market took off and you easily surpassed the 1.1020 take profit goal -- giving you your 1-to-1 take profit. And you had the ability, if so desired, to trail your stops for a reward potential of greater than 1-to-1. If you held to expiration the market expired at 1.0820 so the profit would have been approximately $102 on the
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