Back to Help How to trade knock-outs
Learn how to trade knock-outs – contracts that offer set boundaries to give you a built-in plan. On Nadex, you can buy or sell these unique contracts, giving you the opportunity to profit regardless of market direction. Explore knock-outs in more depth and follow this simple five-step process.
1. Understanding knock-outs
Before you begin your knock-outs trading journey, discover what these contracts are and what they can offer you. We recommend starting with ‘what are Nadex Knock-Outs and how do they work?’
Already know the basics and want a quick reminder? Great! Here you go:
Nadex Knock-Outs trade within a set price range.
This range is set between two price levels – the floor and ceiling.
If the indicative index value hits the floor or ceiling, you’re knocked out of the trade.
This structure provides a natural profit target and pinpoint control over risk.
You can trade forex, stock indices, and commodities markets with knock-outs.
2. Keeping up with the markets
Knock-outs are multi-directional, meaning you have the opportunity to profit whether the market is moving up or down. As with any contract on Nadex, if you think the market’s moving up, you buy. If you think it’s moving down, you sell.
You’ll need to have a good understanding of the markets you can trade using knock-outs so you can form your predictions. Here are some of the ways you can keep up with the markets:
Learn how to conduct your own technical analysis.
Use the technical analysis tools available on Nadex charts.
Explore fundamental analysis and what this can tell you about markets.
Attend a Nadex webinar on market analysis.
Follow financial news and monitor the economic calendar.
It’s also important to have a detailed trading plan so you can manage your risk. This trading plan will outline your capacity for risk, giving you a framework so you can find the trades that fit.
3. Building your confidence with a Nadex demo account
A Nadex demo account can be the perfect way to learn more about the markets. You can explore all your options and gain a good understanding of the way knock-outs are structured, completely free from risk. Sign up for a free demo account to get $10,000 in virtual funds and learn how trading knock-outs works in practice.
4. Considering how much the market is going to move
Once you’ve established predictions on market direction, you need to consider how much you think that market might move so you can pick your price range. This involves balancing risk and reward to suit your trading plan, which is made easy in the Nadex platform – you’ll know your maximum possible profit and loss before you enter the trade.
For each market available on Nadex, there will be four unique knock-out ranges to choose from, each with its own risk-reward profile when buying or selling. At the start of the week, the four contracts will be structured based on the level of the underlying indicative market, each with its own offset. As contracts are ‘knocked-out’, new contracts will be created to replace them using the same structure.
Contract 1: Floor = market - 10 points/ceiling = market + 40 points
Contract 2: Floor = market - 20 points/ceiling = market + 30 points
Contract 3: Floor = market - 30 points/ceiling = market + 20 points
Contract 4: Floor = market - 40 points/ceiling = market + 10 points
The price of a knock-out tracks the indicative underlying market. As the indicative market moves, you’ll see the price of the knock-out contract changing along with it, but the floor and ceiling (the maximum low and high value of the contract) will remain the same. Of all Nadex contracts, knock-outs most closely mirror the movement of the underlying indicative index.
One of two things will happen:
The floor or ceiling is hit and you’re knocked out of the trade, taking your maximum profit or loss.
The contract expires resulting in a variable return. Knock-outs have a maximum duration of one week. You can trade in and out over the course of the week, as the prices of the contracts fluctuate.
If you have strong bullish sentiment and think a market is heading for big gains, you might buy a contract where the ceiling is a long way above the current market price. This presents you with a lower risk, higher reward scenario, because the market price would have to move further to reach the ceiling, knocking you out and giving you your maximum possible profit. If you predict smaller moves, you might buy a contract with a lower ceiling – risk will be higher and profit will be smaller because the market doesn’t have to travel as far for you to achieve your maximum profit.
Remember there’s the option to sell, too. If you’re bearish on a market, you have the exact same options to consider, but the floor will now represent your maximum possible profit, and the ceiling will represent your maximum possible loss.
When you have an order ticket open, you can click buy and sell to see your upside and downside, so you can understand them in relation to the contract’s floor and ceiling.
5. Staying in the trade, or closing out early
Knock-outs give you the choice to close out your trade early. If the market moves without hitting the floor or ceiling, you can take a position in the opposite direction to close out the trade early. There are two reasons why you might want to do this:
Lock in profits. If the market moves in your favor, you might decide to close out early and take your existing profit. This prevents you from taking a loss if the market reverses.
Minimize losses. If the market moves against you, you can decide to close out early and cut your losses. This prevents you losing more capital if the market continues on the same trajectory.
Knock-outs trading examples
Here are two knock-outs trading examples, which will walk you through some potential outcomes:
How to buy crude oil knock-outs
In this example, you can see the Nadex indicative price is at 15.39, as shown at the top of the order ticket – you predict the market will continue moving upwards so you decide to buy at 15.40. You predict that crude oil could climb significantly, so you pick a contract with a ceiling of 18.5 and a floor of 13.5.
These are four of the possible outcomes*:
1. The market moves up, hits the ceiling and you’re knocked out of the trade, making $310 profit.
2. The market moves down, hits the floor and you’re knocked out of the trade, taking a $190 loss.
3. The market moves up, but doesn’t hit the ceiling. At expiry, your profit will be the difference between where you bought the position and the final settlement value of the contract. Let’s say the contract expires and the indicative price is at 16. This is the calculation to work out profit:
16 - 15.4 = 0.6. This means the indicative price has moved up 60 ticks. The tick value is $1, so your profit will be $60.
You can also decide to close the trade out early by placing a sell order. Say the indicative price moves up to 17 a day before expiry. You may decide to close out early, seeing as the market could reverse in that time. 17 - 15.4 = 1.6, so the indicative price has moved up 160 ticks. This gives you a profit of $160*.
4. The market moves down, but doesn’t hit the floor. At expiry, your loss will be the difference between where you bought the position and the final settlement value of the contract. Let’s say the contract expires and the indicative price is at 14. This is the calculation to work out loss:
15.4 - 14 = 1.4, so the market has moved down 140 ticks. This means your loss is $140.
You can also decide to close the trade out early by placing a sell order. Say the indicative price moves down to 15 – it’s moving against you and you change your mind about the trade. If you sell at this price, the calculation is 15.4 - 15 = 0.4, showing the indicative price has moved down 40 ticks. This means your loss is $40, instead of the $190 you could potentially have lost at expiration.
*Outcomes listed do not incorporate exchange fees.
How to sell gold knock-outs
In this example, you can see the Nadex indicative price is at 1728.24, as shown at the top of the order ticket – you predict the market will reverse and move downwards, so you decide to sell at 1728.00. You predict that gold prices could drop significantly, so you pick a contract with a floor of 1691.0 and a ceiling of 1741.0.
These are four of the possible outcomes**:
1. The market moves down, hits the floor and you’re knocked out of the trade, making a $370 profit.
2. The market moves up, hits the ceiling and you’re knocked out of the trade, taking a $130 loss.
3. The market moves down, but doesn’t hit the floor. At expiry, your profit will be the difference between where you sold the position and the final settlement value of the contract. Let’s say the contract expires and the indicative price is at 1710.00. This is the calculation to work out profit:
1728.00 – 1710.00 = 18, so the indicative price has moved down 180 ticks. This means your profit is $180*.
You can also decide to close the trade out early by placing a buy order. Say the indicative price moves down to 1693.00 a day before expiry. You may decide to close out early, seeing as the market could reverse in that time. 1728.00 - 1693.00 = 35, showing the indicative price has moved down 350 ticks. This gives you a profit of $350*.
4. The market moves up, but doesn’t hit the ceiling. At expiry, your loss will be the difference between where you sold the position and the final settlement value of the contract. Let’s say the contract expires and the indicative price is at 1738.00. This is the calculation to work out loss:
1738.00 - 1728.00 = 10. This means the indicative price has moved up 100 ticks. The tick value is $1, so your loss will be $100.
You can also decide to close the trade out early by placing a buy order. Say the indicative price moves up to 1734.00 - it’s moving against you and you change your mind about the trade. If you buy at this price, the calculation is 1734.00 – 1728.00 = 6, so the indicative price has moved up 60 ticks. This means your loss is $60, instead of the $130 you potentially could have lost at expiration.
*Outcomes listed do not incorporate exchange fees.
How to trade knock-outs: further learning
This article will give you a good understanding of the trading process so you know how to enter positions using knock-outs. Check out some of these other resources to find your way around the Nadex platform and gain a good all-round understanding of markets and analysis.
Begin with platform tutorials in the learning center.
Move on to this further reading to become a better trader:
How to read candlestick charts
What are the key economic indicators for traders?
So now you know how to trade knock-outs. You’re ready to practice trading them on your Nadex demo account – sign up now and get trading with $10,000 in virtual funds.