Testing Binary Options Strategies – How To Test Your Strategy

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Testing Binary Options Strategies

Before you invest big in your strategy, you have to test it. This article explains how to test your binary options strategy, and how to find the resources that help you make more money.

In detail, you will learn:

  • Why Testing Strategies Is Vital
  • How Do I Test My Trading Strategy?
  • Which Tools Can Help Test Strategies?

With the answers to these questions, you will immediately be able to test your strategy and find the areas in which you need to improve.

Why Testing Strategies Is Vital

You need to test your binary options strategy for two reasons:

  1. You need a winning strategy, or you will end up broke, and
  2. Knowing whether or not you have a winning strategy is difficult because it is a complex decision.

Only a thorough test will help you understand whether or not you have a strategy that can make you money, and, if not, where you need to improve.

Without a test, these questions are impossible to answer. There are a million of variables, and to find out which of them you have to improve to make more money is like looking for a needle in a haystack. A good test can simplify things for you and help you understand where you need to improve.

Trading Long Term

Even if you lose only 1 percent of your account balance over 100 trades, you would eventually end up broke if you trade this strategy. A test will clearly point out this dilemma. Without a test, you will lack the clear indication and might think that your strategy is about right. It would take you longer to make the necessary changes, or you might never make them. Either way, it would cost you a lot of money.

Testing your binary options strategy is your first step to becoming a successful trader. It can save you from unnecessary losses and make you more money – there is no good reason to forgo testing.

How Do I Test My Trading Strategy?

The most important value of your binary options strategy is the winning expectancy. Testing your binary options strategy means determining your winning expectancy and, if necessary, improving it to a point where your strategy makes you money.

Your winning expectancy is the product of your winning percentage and average total return per winning trade. That might sound complicated but is really easy.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Assume that a strategy wins you 65 percent of your trades. You get an average payout of 70 percent, which means that you get an average total return of 170 percent on every winning trade – you get your investment back (100 percent) plus your payout (70 percent) which nets you a total return of 170 percent.

To calculate your winning expectancy, all you have to do is calculate 170 percent of 60 percent. The result is 112 percent.

Testing Strategy Calculations

Now you know if your strategy is good enough:

  • If your winning expectancy is over 100 percent, you can expect to make money. You can trade this strategy.
  • If your winning expectancy is under 100 percent, you can expect to lose money. You need to improve this strategy.
  • If your winning expectancy is exactly 100 percent, you can expect to break even. You still need to improve this strategy.

The important thing to understand is that the winning expectancy can tell you only whether you will make money with a strategy. It is highly individual value and a bad indicator for comparing strategies between traders.

Every trader is different. They prefer different trading styles, they tolerate risks differently, and they have different strengths. One trader might do better with a strategy based on numbers such as values of technical indicators; another trader might prefer a strategy based on pattern recognition, for example trend analysis or candlestick formations.

If another trader achieves a high winning expectancy with a strategy, this does not necessarily translate well to you. You might lose money with the same strategy.

The point is: to find out your winning percentage, your average payout, and your winning expectancy; you need to test a strategy for yourself.

Large Trading Sample

This test necessarily requires a high number of trades. A test based on only 10 or 15 trades is inconclusive because there is a lot of room for variance and coincidence. You need at least 50, or better 100, trades.

So here’s how you test your strategy:

  1. Trade your strategy for a while.
  2. Note the results of every trade – win or loss, and payout.
  3. Calculate your winning percentage – the share of trades you have won.
  4. Calculate your average payout for every winning trade. Ignore your losing trades for this calculation; they might distort the picture.
  5. Calculate your winning expectancy.
  6. If your winning expectancy is over 100, trade the strategy. If your winning expectancy is under 100, change the strategy until you get a value over 100.

We recommend doing these things in an Excel file. It can automate all calculations, and you can more easily reevaluate the data later.

It also makes sense to keep collecting this data after your initial test. It will help you to monitor your success and recognize mistakes before they cost you money.

Which Tools Can Help Test Strategies?

The most important tool for testing your binary options strategy is a demo account. Demo accounts work just like regular binary options account, but they allow you to trade with play money instead of real money. You get all the features, tools, and binary options types, but without having to fear to lose your hard-earned cash, you can try them completely risk-free.

This is the perfect environment for testing your binary options strategy.

  • If you are completely new to binary options, you can learn the basics without risking anything.
  • You can try different strategies and find the one that is right for you.
  • Experienced traders can try modifications to their strategies or just have some fun.

Testing Via A Demo Account

A demo account can also free you from the need for complicated calculations. Simply trade your strategy for a while and then compare your account balance to what is was before. If you started with £1,000 in play money and now have £1,500, you must have done something right. If you have $500, you have to improve something.

Binary options demos differ from broker to broker.

  • Not all brokers offer demos.
  • Some brokers allow you to register a demo as a stand-alone account; some require you to open a regular trading account and then offer the demo as a feature.
  • Some demos provide you with a lot of play money and allow you to experience the thrill of investing big, others provide you with less money and help you practice starting small.
  • Some brokers allow you to invest as little as £1 per trade; some require significantly more – often around £25 or £50.
  • All demos reflect the features of a broker’s regular account and offer different assets, binary options types, and other features.

To find the right demo for you, take a look at our list of brokers. It will help you quickly understand the differences between brokers and match the multitude of offers to what you are trying to do.

Conclusion

Testing your binary options strategy is the first step to success. A thorough test helps you to find a money-making strategy without risking a single Cent. You can enter the binary options world completely risk-free and improve your strategy until you are ready to invest big.

Testing your binary options strategy also is an ongoing process. Even when you have found a strategy that can make you money, you still have to monitor your success. Careless mistakes can creep into the trading of every trader, which is why you need a tool that keeps you on the right path to success. Testing your strategy is this tool.

With a demo account, you can test your strategy completely risk-free. To find the right broker and the right demo for you, take a look at our list of the best binary options brokers.

How to Backtest a Trading Strategy

Learning how to backtest a trading strategy is boring for most, but necessary for success. If you want to have confidence in your trading strategy, backtesting is the answer. Whether you have a mechanical trading system, some basic discretion, or human input into your trading approach, backtesting remains mandatory.

Our team at TSG has a pragmatic take on strategy backtesting. All of our trading strategies are thoughtfully backtested to prove to ourselves that we have an edge in the market.

Many traders have asked whether or not backtesting is useful?

Yes, it can be useful, especially if you use dedicated backtesting software. However, keep in mind there are also many limitations when you look at your trading strategy in hindsight. There are many different things you can’t incorporate when backtesting, so it can feel like real trading.

Obviously, backtesting is not live trading. You don’t have the emotions within your trading to properly show realistic backtesting results.

Nevertheless, backtesting remains an important part of achieving trading success.

Moving forward, we’re going to discuss the importance of backtesting. More importantly, you’ll learn how to backtest a trading strategy and measure it’s performance. We also have training for the best Gann Fan trading strategy, if you are interested in learning more strategies.

The Importance of Trading Strategy Backtesting

Trading strategy backtesting plays an important part in developing your trading strategy. However, backtesting is just the start because the immediate step is to forward test your strategy. The primary purpose of backtesting is to prove you have valid trade ideas.

If your Forex strategy has a proven edge, you’ll be more confident to pull the trigger when the next trade signal shows up. In other words, you’ll be able to better deal with the emotional side of trading. This is one of the biggest hurdles to conquer.

Another benefit of backtesting software is it helps you skip weeks and months of trading failure, depending on your time frame. You can go through a year’s worth of Forex price data in just a few minutes.

No matter what your trading rules are, you can use any backtesting software to test the reliability of your trading strategy.

The bottom line is, learning how to backtest a trading strategy can help your Forex results.

How to Backtest a Trading Strategy

Make sure you have very specific rules for your Forex strategy. So you know exactly when to take the trade every single time you see it on the chart. That is the only way you’re going to be consistent in what you trade.

If you don’t have specific trading rules for your setups that you follow every single time you take a trade, it will be impossible for you to backtest your trading strategy.

There are two basic ways to backtest a trading strategy:

  • Automated backtesting – that’s dedicated to people who are good at coding. This is also the most efficient way to backtest a trading strategy because the backtest results are unaltered.
  • Manual backtesting – by which you go manually through the charts and find the trades that fit into your trading rules.

You need three things to analyze your trading strategy and hopefully create a million-dollar strategy:

  • The first thing you’ll need is the price data itself or a charting package.
  • Secondly, you need backtesting software or a program that can accurately manipulate the price data. Then apply your trading ideas to it.
  • Most importantly, you need an open mind to think of creative trading ideas to backtest.

For the purpose of this article, we’re going to use a double top and double bottom trading strategy.

So, now that we know what kind of strategy we’re going to be backtesting, we’re going to highlight the key components needed not just to backtest this kind of strategy, but the universal components used as a template for backtesting any type of strategy. Also, read bankers way of trading in forex market.

Without further ado, this is how to manually backtest a trading strategy the right way. These are a few of the variables you want to keep track of:

What currency pair did we use to backtest our strategy?

First, we need to know which currency pair or what financial instrument spotted the double top/double bottom pattern.

Each financial instrument, or currency pair, has its own personality. The backtesting process can reveal which currency pair offers the most accurate and profitable double top/double bottom patterns. Here is another strategy called Time-Based Trading Strategy.

The date you spotted the chart pattern

We definitely want to know the date of the trade that we’ve spotted.

Some days tend to be more volatile. Through trading strategy backtesting, you might find what the best days for these patterns are.

If you find enough, strong evidence that certain days produce better results for the double top/double bottom pattern, you should focus more to take the trades during those days with the best potential.

Time of the day

We need to know the time of the day we took the trade as well. The same as not every trading day is created equal the same holds true for the time of the day.

For example, the Forex market can be divided into four major trading sessions. Your backtesting results should show you what the best Forex trading session is.

Is it the London session?

Or, maybe it’s the New York session?

These are all important backtesting parameters that need to be tested.

Stop Loss and Profit Targets

We probably want to know the stop loss, the profit target and the number of pips that we’ve made or lost on the trade.

While the stop loss is pretty much rigid we can backtest different take profit strategies. You can be creative and use your trading experience to find the best trading strategy.

Rules for the entry strategy

You want to make sure that you have very strict trading rules for your trade setup. For the propose of this article, as we already mentioned, we’re going to backtest the double top/ double bottom chart patterns as our main trading strategy.

The rule number one for our double top pattern is that on the retest of the first high the wick must at least touch the top of the body of the previous swing high.

Allow us to zoom on a price chart and show you what we mean by that:

Our second rule for the double top is that the body of the retest can’t close above the wick of the previous swing high.

We hope the rules make sense. They are the same for the double bottom chart pattern.

Now we have a specific set of rules that we can follow and which will tell me when a double top/double bottom pattern was created. This gives us something that we can test.

The next step is to figure out how we’re going to enter the market if these specific trading rules are met.

Are we going to enter on the close of the second candle top?

Are we going to wait for a small retracement? Or, are we going to do the most common thing and wait for the break of the neckline?

These are all valid entry criteria that can be backtested and see which one yields a better profit outcome.

Now, that we have created our entry techniques we need a stop and take profit strategy.

We can place our protective stop loss above the double top because a break above will ultimately invalidate the level. When it comes to our take profit strategy we can be more flexible and backtest all kind of take profit variations.

Now we have a framework and we know exactly how we’re going to trade this every single time it happens in the market. For this specific strategy, this is pretty much everything we need to backtest this Forex strategy.

At the end you should have a backtesting spreadsheet where you should manually record all the inputs, the same as in the figure below:

Now, back to the charts try to find some of this trading example and record them in the backtesting spreadsheet and see if you can find an edge.

Conclusion

Trading strategy backtesting requires manipulating the backtesting parameters in order to find the most promising trading strategy. This way you’ll ensure that you maximize your profits on your trading ideas. No matter how you put it backtesting is vital for determining the viability of a trading strategy. You can also read our winning news trading strategy.

If you want to be able to execute your trades with confidence you need to learn how to backtest a trading strategy.

Thank you for reading!

Please leave a comment below if you have any questions about trading strategy backtesting!

Also, please give this strategy a 5 star if you enjoyed it!

(9 votes, average: 4.11 out of 5)
Loading.

Please Share this Strategy Below and keep it for your own personal use! Thanks Traders!

How to test binary options strategies on the history

Greetings, fellow binary options traders! Beginners often face the problem of how a fully working trading system suddenly stops working in the real market. And, the reason is not a broker’s fraud or in some wrong indicators. Just at the testing stage, not all factors were taken into account, or the tests were not carried out at all.

It is important to understand that any strategy, even the most trivial, needs some time for approval. It is normal for anyone to make mistakes, and especially in the testing phase, the most obvious disadvantages of freshly-created strategies emerge. In this case, if you tried looking through strategies without testing them, you realize that this approach does not guarantee good quality – there is always a chance to slip up. Demo account is also not the best solution, because it requires too much time to check, while certain trading strategies can be discarded immediately.

In this case, the visual strategy tester is almost a perfect solution. With the help of tester, you can run almost any binary options trading strategy within ten minutes, find out its effectiveness and weaknesses. After a thorough test on history, you will protect yourself from surprises on a real account and will be able to prepare better for the live trade.

Today, we review a unique tool that allows you to trade manually on history, in a simulation mode – BO simulator.

In fact, BO simulator Strategy Tester is a trading simulator, represented in the form of an indicator for MetaTrader 4. By launching the indicator in the visual MT4 tester mode, we can make trades on history, simulating the real trading.

Indicator Features

  • Currency pairs: Any
  • Timeframe: Any
  • Expiration Time: Universal
  • Trading Hours: Around the clock

Installing the indicator on Metatrader 4

  • You must have the Metatrader 4 program installed
  • Download the zip file with the indicator, unpack it. These files need to be copied into MQL4/Indicators folder in your terminal data directory.
  • To get to the data directory, click File -> Open Data Directory in the terminal.
  • Then a folder will be opened, then we enter the Indicators directory of the MQL4 Now, copy the files of your indicator. Close the folder, restart MT4.
  • Next enter your Metatrader 4 terminal, click Tools->Settings on the program’s top panel and on the Expert Advisors tab, put ticks as on the screenshot below. Then click OK.
  • Run the Strategy Tester and click the dropdown Indicator Then we choose our indicator from the list.

Input parameters

  • Starting balance: the deposit you will start trading with;
  • Interest payment: option interest payments – here you better specify the value of your broker;
  • Displayed Font: inscriptions font on the simulator control panel.

Indicator Trade Panel

The upper part has two fields for expiration time input, for minutes and seconds, respectively. Below are the Put or Call buttons, the current price indicator and the field for indicating the size of bets.

Further, this information is displayed:

  • The size of the initial deposit;
  • Interest rate;
  • Current balance;
  • The percentage of growth;
  • The distribution of the types of transactions – ITM, OTM, ATM.

All the rest of the space is given for the transactions.

Each opened transaction consists of blocks with:

  • Option type – Call or Put;
  • Name of the trading instrument;
  • Option buying time;
  • Open price;
  • Price of the option;
  • Current closing price;
  • Remaining time to expiration;

A nice feature is a clear indication of the option expiry time. At the bottom of the block there is a horizontal progress bar, the value of which is reduced in the course of testing, reporting on how much time is left ‘till the contract expiry.

Not to put the same indicators on the chart every time, you can save the template with the needed tools, specifying the name similar to the indicator’s title (without extension). Thus, when you run visual testing the tester will pick up the created template with all the required indicators.

Testing strategy

Let’s try to test a simple strategy on the Bollinger bands. At the candle close beyond the channel, we sell. That is, if the candle closed above the top line, buy a Put option if it is below the bottom – the Call option. Working timeframe – H1 with an expiry time of 15 minutes.

Cascading signals when the candles close one by one beyond the channel boundary should be ignored.

We make transactions as a result of new trading signals, as shown in the picture below.

Conclusion

In conclusion, I would like to thank the author of the development with a nickname MTH2020, who gave so useful and easy to use tool. Actually, the simulator can be used not only to check the ready strategies, but also to train your intuition, or just for the development of the trading process (the indicator can also be used on a regular chart in real-time).

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: