1.3 Strategy Binary Options

International Journal of Entrepreneurial Knowledge
Issue 1/2016, Volume 4

53

To realize the
objective
a
method
of
dorsum-testing
volition
exist
used
for
a period
of ane

month
in
a
5–

minute
time
frame. This
means
that
6912
exchange
rate
values westwardere subjected
to
the
analysis.
The

currency pair EUR/USD has been used as an underlying asset for its high liquidity.

1 THEORETICAL REFERENCE

Every bit

stated
by
Rick

Thachuk

(2010)

,,binary

options

take,

for

some

time,

been

available

over

the

counter
merely

they

are
typically
marketed

equally

exotic
options

to

institutions

and
often

packaged

withursday

other derivative-

dates
back
to
2008,

when

the financial

musical instrument

was

introduced

to

the

public
every bit

a

marketable

asset

at
the

Chicago

Board

Options

Substitution

(CBOE).

American

Stock

Exchange

and

Chicago

Lath

Options

Commutation (CBOE)

listed

binary options

on select

stocks and

indices. Nonetheless,

these have

non

attracted whatsoever significant retail customer base.

However, co-ordinate to Jaworsky (2006), the first binary options were presented
by CBOE at a press

conference
on

10
July
2006

every bit
1

of
its

main

financial
innovation.

Due

to

its

simplicity,

binary

options

have
become

very

popular

among

traders

and

today
are

widely

traded

around

the

world.

The
huge

interest
in

trading
binary

options
likewise

meant
the

emergence
of

many
new
brokers,

who

started to specialize
in this very business instrument. Today, there exist approximately 4 hundred

of them.

During the last few years, though, a

web-based electronic retail market place has developed

that is

becoming
popular,
especially
among
investors
with
niggling

prior

investment

experience or
who
have

limited capital.

According
to

Cofnas

(2013)
,,this

nascent

market

is

reminiscent

of

where

the

retail

forex

marketplace

was viii or x
years ago. It is
a new investment
culling with low cost
entry where all trading
is

conducted over a web-based, real fourth dimension platform on which customers can trade with a simple click of

Until
recently they were

hard

to

obtain, just

a

new
generation
of
web-based electronic

trading
platforms,
equally
well

as

several market

innovations
designed
to
simplify
the
trading

decision,

are generating excitement and activity in retail binary options trading.

Although
the

first
trades

were
realized

on
the

CBOE
(Jaworski,

2006),

today

the

vast

majority
is

carried

out on
the Over

the Counter

markets

(OTC).

OTC

is a
method of

trading when

market

participants trade
directly together. In
practice, the counterparty
of the
majority
of the
trades is
one

of the brokers.

Every bit
stated

by
Miyake,
at

all.
(2013)

,,Binary
options

are

popular
in

OTC

markets
for

hedging
and

speculation. They are also of import to financial engineers as building blocks for constructing more

complex option products.

Thus, binary options

are simple

simply

give important

implication

in

considering various option pricing problems,,.

Binary options are non only interesting investment instrument, but as well an

important tool for

designing complex financial derivatives
such as equity-linked securities (ELS). They can even class

the basis of several exotic options such equally asset-or-nothing options, supershare options, gap options

etc., equally stated Kim Hong-Joong, at all. (2011).

1.1

Types of Binary Options

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via gratuitous access

International Journal of Entrepreneurial Knowledge
Outcome 1/2016, Book 4

54

A

binary

pick,

too

chosen a
digital or
fixed return
selection, has

only

two

possible

outcomes

at

expiry,
each of
which
pays
out
a
fixed
value,
depending
on
whether
or
not

a

sure

condition
has

2013). There are several types of binary options.

The bones blazon is called the
High

/ Low binary pick. If a high option is

used, then a

predetermined
profits
encashed
in

case

that
at
expiry
the
price

of

the
underlying
nugget
will

rise

by

i or
more than

An integrated,
predetermined
profit
is encashed in
case
of fall in
the
underlying
asset. This
type of

choice
is
the
most
common
and
it
may
be
obtained
at
each
banker
running

a

business

with
binary

options (Thacuk, 2016).

Another
type
is


To a higher place
/
Below

binary option.

In
this

case,

we
judge
that

the
price
at
expiry
is

higher up

or

below

a

sure

cost

level.

This

toll

level

is

usually

dissimilar

than

the

current

cost,

which in the previous case is known as the strike cost.

A
third

possible

option

is

a
type

Touch

/
No

Impact

binary
choice.

This
choice

is
assisting

if
information technology

reaches (with
touch option),
or does
not
reach (with
no touch options)
predetermined boundaries
in

the time before expiry.

In
the
example
of
transactions

with
the
blazon
of

Boundary

binary options,

the
profit
is
realized


in

the

example that

at the

moment

of expiry

the toll

of

the underlying

nugget

volition be

situated within

predetermined boundaries.

is

called

KIKO

(Knock-In

and

Knock-Out).

A

broker

outlinesouth

two

price

levels,

one

above

and

1

below the
strike
price.
The tinquire of
the
trader
is to
correctly predict
which
of
these price levels
will

be hit sooner, while it does not matter when information technology happens.

The
most

complicated

kind
of
binary
options

is

known
every bit
the


Ladder.
Several
toll

levels

which

class
an

imaginary
ladder

on
each

side

of
the

current
price

are

stated
past

the
banker.

A

trader

can

speculate,

below

or

higher up
which

level
the

charge per unit

at
the

expiry

volition
exist.

Issued
profitability
for

each

level is
not fixed until
opening trade
simply varies
depending upon
where the electric current
charge per unit is.
This
blazon

of option, notwithstanding, is not common, and about brokers exercise not offer it.

Further
options

can
exist

divided
according

to

the

expiry
date.
This

can
vary

from
minutes

to

days.

Usually
the
longest
time

binary
option
is
offered
with

monthly expiration.
Nevertheless
more
popular

are according to
Thachuk

(2010)
shorter
options
with
an
expiry
of
5,15
minutes,
an
60 minutes or a
day.

In this paper, a xv infinitesimal binary option is used.

i.2 Option Valuation

Let
u.s.

presume

that

the

underlying

assets

follow

geometric

Brownian

motions.
Based on

no

arbitrage

arguments

and

no

cost

for

trading.

Then

the

awards

binary

option canorth

employ



Black

and

Sholes derived equation for the valuation of European stock options.

Today quite a lot of researchers deal with the option valuation including binary option and thus new

methods

for valuating

options

arise. For

instance Hong

joong

and Kyoung-sook Moonz

(2011)

constructed a new
adaptive time-stepping hybrid
difference method
(Blazon I) and
a method
with the

combination of two compatible meshes (Type
II). They are proposed to solve the Black-Scholes partial

differential equation with a pay containing discontinuities.

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via free access

International Journal of Entrepreneurial Knowledge
Issue ane/2016, Volume 4

55

Further, for

case, Zmeskal

(2010), Miyake

(2016) or

Thavaneswarana at

all. (2013)

define

valuating options on the ground of fuzzy logic.

1.iii Technical Analysis of Binary Options

Technical

analysis

is

based

on

the

study

of

supply

and

need.

A

t

recognize a situation at market place, which had repeatedly resulted in a certain evolution of
exchange

rate (da Costa at all, 2015). A strategy for future timing of the buy or sale is then synthetic at

this historical evolution.

Technical

assay works
with diverse

types

of

graphs, the

most widely
used is

the

candlestick

chart. We
distinguish betwixt
two groups
of methods of
technical assay,
graphical and
based on

technical
indicators.

In
this

paper,
the
indicator

Bollinger
bands
is

used
in

connection
with

filters

Stochastic Oscillator,
Relative
Strength Index
(hereinafter referred to
as
RSI) and
Moving
Average

Convergence Divergence (MACD hereinafter).

ii. Inquiry METHOD

The

aim

of

this
paper

is

to

analyze

the
use

of

trading
binary
options

and

to

illustrate

this

on
the

practical example of trades based on the Bollinger bands indicator.

8

strategies will

be

put to

analysis,

where equally

the basis

is

the indicator

Bollinger

Bands. Those

strategies
are
Bollinger
Bands

with

the
twice
standard

deviation

and the
treble
standard
deviation.

In that location

volition

exist

used

a

backtesting method.
Currency pair
EUR/USD volition
exist put

to analysis.

The

currency
pair
EUR/USD
has

been

used as
an
underlying
asset

for

its
loftier
liquidity.

Theastward
length
of

the
time

menstruation

is
one
month

(Jan).
Price
will

be

tested
on
v

minutes
time-frame.
Information technology

ways

6912

foreign

currency
values

volition

be

put

the

analysis.
Candlestick

charts

in
this

paper

are

drawn

from the programme Metatrader 4.

Later on
evaluating

the

prices

using
technical

analysis,

they
were

selected

due southignals

to

purchase

or
sell.

Be

trated hight/low binary option with 15 minutes expiration.

Bollinger

bands

consist

of

three

curves,

every bit

shown,

for

example,

past

Elder

(2006).

Medium

(hereinafter
mean)
is
an

expression
of
the
moving
average

of
closing
prices
of

length
n
of
trading

days (usually

20 day

moving average). This

is normally

referred to as Simple

Moving Average

(SMA).
The

upper
zone

is

equal

to

SMA
plus


r

times
the

standard
deviation

and
the

lower

band

minus the same multiple of standard deviation. The mean describes the relationship,

, where

P
represents the closing
price of the
asset and

chiliad
represent the perion considered. Standard
deviation

can exist describe,

SMAP

nk

ane.

Strategy based on
Bollinger bands
is based ,
according to
Bollinger (1992),
on the
elementary logic that

if 95%
of the
value is
inside
the
zone, then
the intersection zone
could represent
a
indicate to
alter

the
trend
so
that

the

farther developments

inorth
the
exchange

rate

would go

again
between
the
upper

and lower
zone. Strategies
used for
the application in
this article
is based
on
the research
published

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via costless admission

International Journal of Entrepreneurial Noesis
Issue 1/2016, Book 4

56

or lower zone of Bollinger bands.

Private indicators
alone,
yet,
often provide
a
lot
of false
signals.
It is therefore
appropriate

to combine private indicators. Several works near
relatively loftier uncertainty of strategies based

on only
1 indicator
have
been Publisher,
for examle
the
web BabyPips.com
(2016) published the

results
of
a
5-yr
backtest
on
selected
indicators.
This

test

revealed that

simply MACD
indicator

and

Ichimoku

Kinko

Hyo

is

possible

to

apply

long-term

separately.

Therefore,

they

volition

be

added

filters and so, Relative strenght alphabetize
(RSI), Moving
Average Convergence
Difference (MACD) and

Stochastic Oscilator (SO).

SO idue south a

oscilator
indicator
that
indicates
when
information technology
is
probable that
the
electric current
trend
turns.
Theory
of

this

indicator

says
according

to

Cory

Janssen
at

all.

(2016),

if
the

indicator
is

growing,
commutation

rates
have

a
tendency

to
conclude

candle
on

the

bull

and

vice

versa.
Internet

stochastik

(%K)

tin can

be

expressed as,

, where

C

is

today

price,



L

is

the

lowest

toll

for

a
selected

number

of

days,



H

is

the

hights

price

for
a

selected number of days. And the dull stochastic describes relationship,

)(three

)(3

0

0

50Hsouthwardum

FiftyCsum

D

.

If this point given
by Stochastic oscillator
is likewise supported past crossing the
Bollinger
Bands on the

advisable candle, it can exist regarded as a betoken to the whole strategy.

Relative

Forcefulness

Index

(RSI)

belongs

again

to a
group

of

oscilator

indicators.

The

author

is

an

analyst Welles J. Wilder. RSI

is defined past

Reinkensmeyera (2014) as an indicator,

which

compares the

size of

the growth and

decline rates in

an attempt to

make up one’s mind overbought

and

oversold market. RSI describes relationship,

, where

RS
is
growth
in
cyberspace
boilerplate
closing
prices
for
a
selected
number
of
days
divided
downward
in
net

average endmost prices for a selected number of days.

For the strategy using RSI there is
applied again
relatively simple logic. The signal is
when the RSI

bend crosses the limit of 30% from beneath or the limit of seventy% from higher up.

Moving Boilerplate Convergence
Divergence (MACD) is a
trend indicator
that
shows the relationship

betwixt
2
moving

averages of
substitution
rates.
The
MACD

is

calculated
past
subtracting

the
26-

mean solar day exponential moving average (EMA) from the 12-day EMA.

chiliadn1000
EMAEMAMACD
)()(
2412
, where

g
represents

the

number

of
periods

included

in

the

calculation

of

the EMA,
and


n

represents

the

relative position of the current period.

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via gratuitous access

International Journal of Entrepreneurial Knowledge
Upshot i/2016, Book iv

57

To determine the point is then a nine-day EMA chosen Signal Line by Cory Janssen at all. (2016) or

Elder (2006) put into the chart.

3. RESULTS

During the
period under
review it
was
possible to
carry
out 473
trades
based
on strategy
Bollinger

bands
with

twice
the

standard
deviation

.
Out

of
these

trades
there

due westere
with

a
15

minute
binary

pick 206 trades profitable and 267 lossy. The employ of only Bollinger bands with
a double deviation

is unprofitable and can be likened to a random option of trades.

By multiple
increasing of
the
standard
deviation
to
treble
nosotros
will
reach
99.seven%
probability that

the

values of the exchange charge per unit move in the range of both bands. Information technology is therefore clear that the signals will

be

more reliable,

simply

at the

expense

of their

number.

For a

specified catamenia

information technology was

possible

to

implement with
3 deviations only 17
trades. Out
of these signals 12
trades would
stop with a profit.

That is seventy% of the right signals.

Strategy
with
filter

SO
was
evaluated

once more
in
a

calendar month

catamenia.
When

using

a

double
deviation
of

Bollinger

bands

there occurred

63 articulate

signals

during

this flow.

These

signals

resulted in

41

profitable and 22 unprofitable trades. The Strategy provides a 65% profitable trades and tin

therefore exist considered successful.

When

using

a triple
difference

and

a

filter

of

stochastic oscillator

there

could

be

fabricated only

4

trades for the whole menstruation. Three of them were profitable. There were thus 75% assisting trades.

RSI filter
with
a doubleastward deviation
of
Bollinger
bands provided only
40
clear
signals for
the
period.

Out
of
these
signals

22
trades
were
successful.

It

ways that

under
this

combination
of
indicators

at that place are 55% profitable trades.

Over a period of i
month
indicator Bolinger
bands with
3 deviations
and RSI
filter has
given

a total of five
signals. Out of
these five, four signals
were profitable.
Information technology can be stated that there were

80% profitable trades.

As a signal is
then used the situation
of the
MACD and a bespeak line intersection or the MACD
and

nix

line intersection,

or

according

to Kaufman

(2013)

the divergence

of

toll

and the

MACD

indicator may be
used. In this paper
a fundamental
intersection with
the signal lines is concidered a

signal.

During this
period
information technology
was possible
in
combination
with
a double
deviation
of Bollinger
bands
carry

out
35
trades.

Out

of

these
signals
21
were

profitable

and
14

unprofitable,
which
represents

60%

success
rate.
In
the

case

we
would
eliminate
the

candles

that
intersect
mean,
then
the

success
rate

would exist 67%.

The
Bollinger
bands
indicator
with
three
deviations
and
the
MACD
filter
gave
but
one
signal
for

the whole period. This signal was profitable. The combination of the filter and the
indicator

provided in this timeframe 100% profitable trades.

4

DISCUSSION AND Decision

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via free access

International Journal of Entrepreneurial Knowledge
Result one/2016, Volume 4

58

The post-obit table summarizes the results of the backtest.
The first column includes
a examination strategy,

the
following

1

the

number

of

transactions.

The
final

cavalcade
defines

how

many
of

these
trades

would be assisting in the example of 15- infinitesimal binary option application.

Tabular array 1


Summary of the backtest results

Number of Trades

Number of

Profitable Trades

Percentage

of Profitable

Trades

Bollinger bands with a double

difference

473

206

44%

Bollinger bands with a triple

difference

17

12

70%

Bollinger bands with a double

deviation Filter: Stochastic

oscillator

63

41

65%

Bollinger bands with a double

deviation

Filter: RSI

forty

22

55%

Bollinger bands with a double

deviation Filter: MACD

35

21

60%

Bollinger bands with a triple

deviation Filter: Stochastic

oscillator

4

3

75%

Bollinger bands with a triple

deviation

Filter: RSI

5

4

80%

Bollinger bands with a triple

difference Filter: MACD

1

1

100%

(Source:
Author, 2016)

The
table
shows
that

almost
trades
could
have

been
realized
with
the

utilize

of
Bollinger
bands
with

a

double
deviation.
This
strategy,

even so,

also
showed
the

greatest

percentage
of
failed
trades.
On

the
contrary the fewest transactions

could

take

been

carried
out
with
Bollinger
bands
with
a
triple

departure and the MACD filter.

From the

results of

the percentage success

rate of

individual trade

transactions can

exist marked

Bollinger bands
strategy with
triple
tolerance as
the about
successful and
the use
of
the
MACD as
a

filter of unsuitable signals. This strategy showed no false signal during the
reporting flow.

However,
it

should
exist
noted

that
throughout
the

period
it

gave only
one

merchandise

opportunity.
It

is
a

question of
money
management,
whether
a strategy providing multiple
signals

would not
be
more than

profitable with the express resources at one trade. This may exist a discipline of further research.

REFERENCES

[1]

Babypis.com

(2015)

What

is

the

All-time

Technical

Indicator

in

Forex?

http://www.babypips.com/school/uncomplicated/common-nautical chart-indicators/what-is-the-most-

assisting-indicator.html#ixzz42VT4RrgO. Consulted: 8. iv 2013

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via free admission

International Periodical of Entrepreneurial Noesis
Issue 1/2016, Book iv

59

[ii]

Blain

Reinkensmeyer.

(2014)

Technical

Assay,


Using

the

Relative

Strength

Alphabetize.

https://world wide web.stocktrader.com/2007/05/29/technical-analysis-using-the-relative-strength-alphabetize/

Consulted: 1.iv.2016.

[3]

Bollinger, John. (1992) Using bollinger bands. Stocks & Bolt. 10.2: 47-51.

[4]

Confas A. (2013)
Pros and
cons of binary
options.

Futures: News,
Analysis and Strategies
for

Futures, Options and Derivatives Traders. March 2013. Vol. 42 Issue two, p x-ten.

[v]

da Costa,
T. R. C

Trading
system
based
on
the
use

of
technical
assay:
A
computational

experiment.
Journal

of Behavioral and Experimental Finance, half-dozen, 42
55.

[vi]

Cory Janssen,
Chad
Langager and
Instancey Spud.
(2016)
Technical Analysis,
Indicators And

Oscillators.

http://www.investopedia.com/university/technical/techanalysis10.asp



Consulted:

31.3.2016

[7]

-239-7048-8.

[8]

Jaworski,

A.

(2006)

CBOT
Launches

Binary
Options.
Securities
Industry
News.

18,
27,

xi,

24.vii., 2006. ISSN: 10896333.

[nine]


http://www.binarni-

opce.com/manual-binarnich-opci/co-jsou-to-binarni-opce-a-jak-to-funguje

Consulted:

8.

four

2013

[10]

Kaufman, P.J. (2013) Trading
Systems and Methods, fitht
edition. New York: John Westiley and

Sons. ISBN 1118236033.

[11]

Kim,

Hong-Joong;

Moon,

Kyoung-Sook.

(2011)

Variable

time-stepping

hybrid

finite

difference
methods
for

pricing
binary

options.


Bulletin
of

the
Korean
Mathematical

Lodge.

Volume 48, Issue ii, 2011, pp.413-426, Publisher : The Korean Mathematical Society

[12]

[13]

Miyake,

Grand, Inoue,

H,

Shi, J,

&

Shimokawa, T
2014, ‘A

Binary

Option Pricing

Based on

Fuzziness’,

International

Journal
Of
Data

Technology
&
Decision

Making,

13,

6,
pp.

1211-1227, Business Source Premier, viewed 26. 4. 2016.

[14]

Rick

Thachuk



(2010)

Binary

options

–

the

northwardext

big
retail

investing

boom?.

FOW

[online].

2010. ISSN 14629658.

[15]

Thavaneswarana,

A. Appadoob, S.S.

Frank, J (2013) Binary option pricing using fuzzy

numbers.
Applied Mathematics Letters, Volume 26, Issue 1, January 2013, Pages 65
72

[16]

Zmeskal,

Z.

Generalized

soft

binomial

American

real

pick

model

(fuzzy
stochastic

approach).
European Journal of Operational Research, 207 (2010), pp. 1096
1103

– 10.1515/ijek-2016-0004

Downloaded from PubFactory at 09/06/2016 02:35:53PM

via free admission