Last Updated on August 25, 2016 by
This article discusses why candlestick trading is an platonic way to merchandise binary options.
Viewing price action in the form of Japanese candlesticks was popularised by Steve Nison. Candlesticks are at present the default view in near trading software and glancing at a nautical chart shows why.
The use of colours to distinguish bull and bear confined makes them easy to identify. The charts make a clear contrast between the real trunk (between the open and close) and wicks (between the high and low)
Automated Trading using Candlestick Charts
Candlesticks are not only useful for viewing the markets and getting a quick understanding of price action, they besides are easy to incorporate into automated trading systems. Automatic trading relies on the designer being able to replicate what is happening on the screen into a series of logical steps.
Candlestick charts are constructed using open up, high, low, shut cost information and many patterns volition utilize but a few bars of information. They are therefore much easier to plan compared to systems that rely on data from many bars.
Candlestick Trading for Binary Options
Options were developed to allow investors to hedge risks in a portfolio. Purchasers of an option take the right to buy or sell the underlying instrument at a sure price before a certain time. For investors, options act as a form of portfolio insurance.
Traders buy and sell options to make a turn a profit from market place moves and marketplace volatility. Options let traders to take advantage of margin to make bigger profits and losses they would do past trading the underlying instrument.
Binary options expect like to traditional bets. Trading a binary option risks a set amount of capital and wins a set corporeality. With an fourscore% payout a binary option trade of $100 risks $100 and wins $lxxx.
The most pop type of binary option trade is the Higher-Lower merchandise. To win the trader must correctly estimate whether the market will be college or lower than the current cost at a gear up fourth dimension. This type of bet often has a payout around lxxx% and so the trader must be right more than 55.5% of the time in order to exist assisting.
In normal trading, a winning pct of more than 55.5% would be easily attainable, however, for binary options the trouble is that the trade will expire at a fixed time. Therefore whatsoever trading strategy must take account of the time chemical element.
Candlestick trading is one way to address the issue of timing.
A Candlestick Trading Strategy
I have come up with a trading strategy that is uncomplicated to utilize and deals with the issue of timing by trading one bar ahead. Therefore the strategy will enter at the close of a bar and exit at the close of the following bar.
As you volition see when you watch the video beneath, the trading strategy has been profitable over the past 4 years on the EUR/USD fifteen infinitesimal timeframe. The trading strategy is a reversal strategy.
- Long trades require 3 consecutive lower bars. Short trades require 3 consecutive higher confined. All of them with a minimum body size that tin be varied.
- 4th candle must be a Doji with a small body. Doji body to be a minimum size that can exist varied.
Video Describing the Trading Strategy and how it tin be Backtested
Using Excel to Backtest the Binary Option Strategy
Microsoft Excel is a very useful tool for backtesting trading strategies. Binary options are insufficiently simple way of trading and are ideal to exist backtested using Excel. Excel tin can handle quite a lot of data, in the video above I am testing 100,000 fifteen minute periods.
In the video I showed how the rules for this simple candlestick strategy can exist programmed into Excel. I did this using an IF statement
The long trades were opened using the following:
Short trades were opened using the following:
How to Improve the Strategy
In the video I discuss a number of ways that this trading strategy could be improved. Once we have the basic model in Excel, information technology is easy to alter variables to refine the strategy.
- There are 2 variables built into the strategy. The size of the Doji and the size of the preceding candles. Either or both of these could exist tweaked.
- I have set up the number of preceding candles at three. This number could be changed to 4 to identify a longer trend or 2 for a shorter trend.
- About dojis accept a modest body, the colour of this could be used to identify preferred trades. For example a crimson Doji may exist more profitable for short trades and a green Doji may exist more profitable for long trades.
- The trading strategy does not distinguish between types of Dojis. Different shapes of wicks give the pattern a dissimilar look. Hanging man or falling star patterns may exist more profitable.
- The profitability of the design may be affected by the preceding momentum. Nosotros could exam whether the pattern is more effective in a downtrend or an uptrend.
Use Excel to Backtest Trading Strategies
If y’all are interested in using Excel to backtest trading strategies my Ebook grade: How to Backtest a Trading Strategy using Excel is available in the Amazon Kindle Bookstore.