Trading strategies are plenty. With all the often very different types of trading strategies it is easy to lose sight of what choosing a strategy comes down to. Four very basic elements that make every type of strategy easily comparable and allow you to make a good, simple decision on which strategy to use for your trading.
What really matters when choosing a strategy
Often, different trading strategies are complicated ways of saying the same thing. Here are the three elements you should use to evaluate every trading strategy and determine whether a strategy is right for you.
The first value you can use to choose a trading strategy is the winning percentage. The winning percentage indicates how many of your trades you will win.
Depending on your strategy and, most importantly, your binary option type, the winning percentage can vary greatly. When you trade a strategy with high / low options, your winning percentage should be around 60% to 70%. With touch options, on the other hand, your winning percentage can be much lower, often as low as 30% to 40%.
Both types of strategies can make you money. As a trader you have to choose the type of strategy that suits your personality best. Do you need to constantly win trades? Then a strategy with a higher winning percentage might be right for you. Can you endure longer losing streaks? Then a strategy with a lower winning percentage might be better for you, as this type of strategy has other advantages.
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Generally, a strategy with a higher winning percentage will create a lower payout per trade, and a strategy with a lower winning percentage will create a higher payout per trade.
This, too, has psychological implications. When you trade a strategy with a high payout, rewards will be rare but big. With strategies with a lower payout, rewards will be common but small. Some traders cannot bear the thought of rare rewards, others can’t bear the thought of small rewards. Depending on where you come down on this question, you should choose your strategy accordingly.
You can evaluate a strategy’s winning expectancy by multiplying the strategy’s winning percentage with its payout. For a strategy with a winning percentage of 65% (= 0.65) and an average payout of 75% (total return = initial investment of 100% + payout of 75% = 175% = 0.75), you have a total winning expectancy of 0.65 x 1.75 = 1.1375.
As long as a strategies winning expectancy is bigger than 1, you can expect it to make you money. Do not make the mistake of simply choosing the strategy with the highest winning expectancy. If this strategy is a bad fit for your personality, you will not be able to execute it properly. Therefore, you will lose money with this strategy. Choose a strategy with a positive winning expectancy that is a good fit for your personality. Than you should be able to make money by trading binary options.
Aside from winning expectancy, the trade frequency of each strategy determines how profitable a strategy can be for you. The winning expectancy calculates how much money a strategy will make you over a certain number of trades. With different types of strategies, however, this amount of trades will be spread over a different time frame.
Over the time of one month, strategies with the same winning percentage can therefore generate wildly different results. A strategy that generate one trading opportunity for you per day will make you less money than a strategy that generates five trading opportunities, even if they have the same winning expectancy.
There a number of indications you can use to evaluate a strategy’s trade frequency. Most importantly, look at the time frame and the expiration time a strategy requires you to use. The shorter they are, the more trades you will find in a day. The longer they are, the more trades you will find.
Easiness of generating signals
When you have found a strategy that suits your requirements for personality and possible return, you should evaluate if you are comfortable with how the strategy creates signals. Some strategies create signals by using technical indicators, others by using candlesticks, and others by using trend analysis. Depending on which of these methods you are the most comfortable with, you should choose your strategy accordingly.