Playing Around with Profit Combinations and the Necessity of Having a “Back-up Asset”

mifunemifune Posts: 160 ✭✭
edited January 2015 in Binary Options Strategy
Although I tend to stick with the EUR/USD for trading, as it gives pretty consistent price moves day-to-day and nearly always provides a robust market (it's the most liquid/traded forex pair), I keep the GBP/JPY as my primary back-up. It tends to pay out well on various brokers, which is an important consideration, of course, as you always want to maintain the highest profit margin possible. When the EUR/USD market is looking uninspiring I venture over to the GBP/JPY to see observe if it represents a more favorable market, or could potentially be. It also has the benefit of not being too highly correlated with the EUR/USD by virtue of the fact that there is no direct currency overlap.

The Euro and British Pound tend to move similarly given the geographical similarity, but with the strong influence of the U.S. dollar in the EUR/USD and the separate, albeit more minor, influence of the Japanese Yen, they provide separate movement styles. If one's back-up pair for the EUR/USD is the GBP/USD, for example, you're going to receive very identical trends and movement patterns. Oftentimes, they basically mirror each other nearly move for move. Hence, trading both at the same time is basically pointless in a large sense.

The first criterion, without question, would be sheer payout percentage. An asset that pays out 85% for a winning trade is vastly better in terms of the type of profit it can earn than a 72% in-the-money asset. The 85% pair also holds the additional benefit of decreasing your break-even percentage – that is, the percentage of trades you would need to win just to break-even profit-wise, assuming fixed-investment money management. An 85% pair merely necessitates a 54.05% winning percentage. That can still be difficult to attain over the long run. But it is much more managable than needing to win 58.14% of your trades as you would with an asset that pays just 72% for a winning trade.

If you care to play around with profit combinations, you can find and download the spreadsheet in the forum by clicking on this highlighted citation.

To illustrate, let's say you take two trades per day, have an in-the-money percentage of 60%, start out with $1,000 and invest 2% of one's balance per trade. By trading the 72% payout asset, at the end of 60 trading days (120 trades total), you will have earned $80. By trading the 85% payout asset, at the end of this same span you will have earned $301, or nearly four times as much.

On a tangential sidenote, one might be thinking, “Either way, trading every day for twelve weeks and having only $300 to show for it is terrible.” While it may not be a huge amount of money, it very often takes a large amount of initial capital to make a sizable profit as a trader. If your initial capital is $10,000, then your profit would be ten times as great. By trading the 85% asset, you would earn $3,014. That still isn't that much for three months' worth of work, but it's a bit better than $300 certainly. After another twelve weeks, one's profit would be up to $3,922 again assuming 60% of those 120 trades were won in that span.

Of course, one can improve on this by either increasing the percentage amount invested (not recommended) and/or increasing the number of trades taken (also not recommended). Increasing the amount invested to 5% of one's account balance is very risky. Losing just three trades in a row will reduce an account balance 15%, which is a substantial hit. For a professional fund, that would be absolutely devastating. For a retail binary options trader, it can happen within an hour or less in many cases. I never invest more than 1% of what I could realistically afford to lose to trading and the most I would ever recommend is 2%. Some professional traders are conservative to the point where they only invest 0.1% of their available capital.

Increasing the number of trades taken is also a pretty substandard strategy. This often comes in the form of a more aggressive strategy by taking lesser quality setups or by following more assets. In my earlier days, I adopted the strategy of following four (and sometimes more) assets at once. But after a while I cut it back due to all the information I had to keep an eye for hours on end. I went to following two, but eventually felt best at one and kept it that way. As a result, my trading volume has been cut way down. Now instead of 10-20 trades per day, which was highly stressful and had good but not consistent results, I normally take 0-4 each day. Currently, I only keep tabs on two pairs at once in the event of a languid, slow-moving market.
Sign In or Register to comment.