ABBOS Expert’s review of Statistical Method for options trading
Statistical method of binary options trading is not the easiest of the existing popular trading systems. The main difficulty of this trading strategy is that a trader must analyze a large amount of the necessary information before he starts trading. The main advantage of the trading system is its high level of reliability and profitability. The let-down of the strategy is that it requires a very laborious preparation process that takes a lot of time.
Statistical method of binary options trading is based on Kelly’s probability theory and method of Martingale. Kelly’s theory is based on the probability of a certain outcome. When tossing a coin, if it repeatedly falls tails, the probability that the next it falls heads is very high. Martingale method is based on the consistent increase in the volume with a view to cover the losses in anticipation of winning. As for Kelly’s theory with each losing the chance of winning is increasing, the system must be profitable.
Let’s take a simple live chart of any asset and note that several red candles are always replaced with green candles regardless of anything, and vice versa – green candles are replaced with the red ones.
When the occurrence of the same three candles, for example, bullish, the chance that there will be the opposite color candle is growing. It is expected that this will be a temporary correction, rollback or definitive trend change. According to statistics, the candle which has the opposite direction is formed the 4th, 5th or 6th, but you should always be aware that it sometimes happens that the chart can show up to 11 monochrome candles, and that is why it is very important to analyze the history of the chart behavior in such situations.
For example, let’s take a chart with a 15 minutes time interval (1 candle – 15 minutes), the currency pair – NZD / USD.
When within our eyeshot three red (bearish) candles appear, we should buy the option of reverse direction, namely Call, with a term of living of 15 minutes, for 1-2 minutes before the 3rd red candle closes. It is important to take into account the option’s term of living, because 1 candle equals 15 minutes, and the option’s term of living also has to be equal 15 minutes.
After waiting for some time, we can see how three new green (bullish) candles occur, and with the help of probability theory we expect the fourth bearish candle. Here also, as in the case above, we have to buy the option of the opposite direction with the same timeframe (15 minutes) for 1-2 minutes, but the price continues to rise, so next we buy PUT options on the 5th and 6th candles applying Martingale principle, and as a result on the 6th candle we successfully come out with a victory.
As you can see by yourself, such signals are often formed and with the help of probability theory we can earn more efficiently.
To start trading on the statistical strategy it is recommended to wait until a few candles in a row close in the same direction. You have to enter the market with the volume, previously calculated on the basis of Kelly principle. At the same time the volume of the transaction is calculated from the amount of your deposit and the number of candles used in the calculation. Martingale principle is used for the further conduct of trade. It implies an increase in the volume of traded transaction.
In order to start trading according to the statistical system, a trader should conduct his own market research on as long period as possible. Then he must bring out his own candle statistics, according to which in future he will carry out market analysis. If according to the derived statistics after the appearance of four consecutive bullish candles the fifth candle is usually bearish, the trader should sell a Put option. Entering the market, the trader expects in this case a temporary and small market rollback or complete reversal of the bullish trend. If according to the trader’s statistics after four bearish candles usually one or more bullish candles occur, the trader should buy a Call option. In this case, the trader expects the shift of bearish trend or a short-term rollback.
Statistical method of binary options trading in practice shows very good results, but this system involves the use of Martingale method, which is considered to be quite risky by experienced traders, especially for beginners. But if you are not greedy and do your trading strictly by the rules of the system, you will be able to achieve good results. And remember, to understand how profitable this or that trading system is, you have to test it in practice.
- Usually the term of expiration of binary options purchased on such strategy is the end of the day, which frees your time for other business or trading with other strategies.
- Trade on statistical strategy is psychologically comfortable, because on its application the entry point is already defined, as the probability of a winning trade, and the trader has no doubt, because he knows for sure that the probability is on his side, and even a losing trade will not bring negative.
- Suffice it once to find a pattern of the asset price behavior, depending on the day of the week, season, month, or any event happening periodically, draw up rules of the strategy with a precise indication of when you are to enter the market, and continue trading on such a strategy, spending only 5-10 minutes a day, week or month, it depends on the frequency of transactions required.
- One of the main drawbacks is the small number of transactions. For news and events affecting the market do not occur every trading day, so the number of transactions can be very small (for example, there is a strategy which supposes 8 transactions per year).
- Traders have to deal with a huge amount of information.
That’s all for now. Got any questions? Just ask the expert!