Last Updated on August 25, 2016 past
This article discusses why candlestick trading is an platonic mode to trade binary options.
Viewing price action in the grade of Japanese candlesticks was popularised by Steve Nison. Candlesticks are now the default view in virtually trading software and glancing at a chart shows why.
The utilize of colours to distinguish bull and bear bars makes them easy to identify. The charts make a clear contrast between the existent body (betwixt the open and close) and wicks (between the high and low)
Automated Trading using Candlestick Charts
Candlesticks are non only useful for viewing the markets and getting a quick understanding of cost action, they also are easy to contain into automated trading systems. Automatic trading relies on the designer existence able to replicate what is happening on the screen into a series of logical steps.
Candlestick charts are constructed using open, loftier, depression, close toll data and many patterns will utilise but a few bars of data. They are therefore much easier to programme 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 have the right to buy or sell the underlying instrument at a certain price earlier a certain time. For investors, options human action every bit a form of portfolio insurance.
Traders buy and sell options to brand a turn a profit from market moves and market place volatility. Options allow traders to take reward of margin to make bigger profits and losses they would do by trading the underlying instrument.
Binary options await similar to traditional bets. Trading a binary option risks a set amount of capital letter and wins a set amount. With an 80% payout a binary option trade of $100 risks $100 and wins $80.
The most popular type of binary option trade is the College-Lower trade. To win the trader must correctly guess whether the market will exist higher or lower than the current price at a set time. This type of bet often has a payout around eighty% and then the trader must be correct more than 55.5% of the time in club to be profitable.
In normal trading, a winning percent of more 55.5% would be easily accessible, however, for binary options the problem is that the trade will expire at a fixed time. Therefore whatever trading strategy must take account of the time element.
Candlestick trading is ane way to address the issue of timing.
A Candlestick Trading Strategy
I accept come with a trading strategy that is simple to utilise and deals with the result of timing by trading ane bar alee. Therefore the strategy will enter at the close of a bar and go out at the close of the following bar.
As you will run across when yous watch the video below, the trading strategy has been profitable over the past 4 years on the EUR/USD fifteen minute timeframe. The trading strategy is a reversal strategy.
- Long trades crave 3 consecutive lower bars. Brusk trades require iii consecutive higher bars. All of them with a minimum torso size that can be varied.
- quaternary candle must be a Doji with a small body. Doji body to be a minimum size that tin be varied.
Video Describing the Trading Strategy and how it can be Backtested
Using Excel to Backtest the Binary Option Strategy
Microsoft Excel is a very useful tool for backtesting trading strategies. Binary options are comparatively simple way of trading and are ideal to be backtested using Excel. Excel can handle quite a lot of information, in the video above I am testing 100,000 xv minute periods.
In the video I showed how the rules for this simple candlestick strategy tin be programmed into Excel. I did this using an IF argument
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 means that this trading strategy could be improved. Once we take the basic model in Excel, it is like shooting fish in a barrel to modify variables to refine the strategy.
- There are 2 variables congenital into the strategy. The size of the Doji and the size of the preceding candles. Either or both of these could be tweaked.
- I have set the number of preceding candles at iii. This number could be changed to 4 to place a longer trend or 2 for a shorter trend.
- Nigh dojis have a modest body, the colour of this could be used to place preferred trades. For case a crimson Doji may be more than profitable for short trades and a dark-green Doji may be more assisting for long trades.
- The trading strategy does not distinguish between types of Dojis. Different shapes of wicks give the pattern a different expect. Hanging man or shooting star patterns may be more profitable.
- The profitability of the pattern may be afflicted by the preceding momentum. Nosotros could test whether the design is more effective in a downtrend or an uptrend.
Use Excel to Backtest Trading Strategies
If you are interested in using Excel to backtest trading strategies my Ebook course: How to Backtest a Trading Strategy using Excel is available in the Amazon Kindle Bookstore.