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Published On: Fri, Dec 14th, 2012

Do Binary Options Trading Systems Work?

Many binary options traders start trading without any system whatsoever. They base their trading decisions on random factors, which often results in them wiping out their initial capital in a fairly short period of time.

This is when they start to realise that random trading does not work. There has to be a system of some sorts.

The reason for this is easy to show mathematically. A system based on guessing will, over a large number of trades, most likely produce 50% winners and 50% losers. A winning trade will on average pay out about 70%, while a losing trade will mean the total loss of the initial premium.

Assume for example the trader risks $50 per trade. Over a 100 trades this would mean 50 winning trades, each one paying out 70% x $50 = $35 and 50 losing trades each one costing 100% $50. The net result equals 50 x $35 – 50 x $50 = $1750 – $2 500 =  a net loss of $750.

To break even this trader would need a system producing about 59% winning trades. Over a 100 trades this would give a profit of 59 x $35 – 41 x $50 = $15. Nobody trades to break even though, so the ideal system should therefore produce winning trades of well over 60%.

Is a winning system possible?

With the use of technical indicators, such as linear regression, the MACD or Bollinger Bands, a trader should be able to significantly enhance his/her chances of making 60% or more successful trades. Combined with the skilful use of candlestick charts, the trader should in the end be able to develop a system consistently producing 2 winners for every loser, i.e. a win ratio of about 67%. Such a system will inevitably also have to incorporate strict money management rules.

Self-developed or buy?

It takes hundreds of trades to build or evaluate a trading system. That is why traders without the time or inclination to study chart patterns, money management and technical indicators often opt for commercial trading systems.

Some of these systems are so-called black box systems – i.e. they send out trading signals without explaining the rationale behind them. This is the best way never to learn how to become a good binary options trader.

A commercial system developed by a highly regarded expert in the field and which is based on the sound interpretation of chart patterns and indicators could of course work – and over time the trader will learn how to refine the system to suit his/her own trading style and risk tolerance.

A word of caution

A system which works under one set of market conditions, e.g. a strongly trending market, might not work at all in a range-bound market and vice versa – unless the rules of the system makes it highly adaptable to different market conditions.

Conclusion

A successful binary options trader has to follow a system. This does not have to a highly expensive commercial system though – there are many fairly good free systems available. Over time the ultimate aim for every trader should be to develop a personalised system which perfectly suites his/her trading style and risk tolerance and which could be adjusted to make provision for changing market conditions.

 

 

 

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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