Emerging Trends in Binary Options Trading: Algorithmic Trading
A few years ago, the concept of algorithmic trading was rarely mentioned in the retail Forex market, let alone the binary options market which was only opened up to retail investors in 2008.
Now, algorithmic trading seems to be the in-thing in the forex market, and it is only a matter of time before binary options traders will start to develop and adopt algorithmic trading systems for their binary options accounts.
So what is really the big deal about algorithmic trading and why is it the next big thing as far as binary options is concerned?
What is Algorithmic Trading?
Algorithmic trading is an automated way of defining entry and exit rules for every trade performed in the financial markets. What algorithmic trading does is that it creates a trading system which is impartial, devoid of emotions and consistent.
Algorithmic trading is now fully in use in forex and other financial markets, but is yet to make in-roads into the binary options market. This is because the binary options market presents some peculiarities that other markets do not have. These are:
- The fact that trades in binary options have a lifetime and are terminated by expiry dates.
- The expiry dates/times are not uniform from trade to trade.
- Percentage payouts are also not uniform and change according to market conditions.
However, attempts are being made to develop algorithmic trading techniques which are unique to the binary options market. A general approach to developing algorithmic trading techniques will require the following steps:
- Obtaining historical data
- Developing the rules for the system
- Testing the rules on demo
- Testing the rules on a live account
- Modifying the strategy to match evolving conditions
Obtaining Historical Data
If you have ever come across the work of W. Gartley (Trading Chaos) or followed the work of John Elliot and his Elliot wave theory, you will see that both men came to one conclusion: events in the market will be patterned after past market events, especially when the conditions that led to the past events are found to occur at the present time. Simply put, the market evolves in cycles. To be able to instruct your system robot to trade according to a set of rules, such rules must be developed based on historical data and tested against them. You therefore may need to get data for at least 10 to 15 years back on which to develop your trading algorithm.
Developing the Rules
For the binary options market, you will have to develop and algorithm that will last for a certain amount of time, and cause it to choose an expiry which will accommodate the time period that the profitable trade condition will remain active. This will ensure that when the trade expires, the desired result would have been obtained.
Test the Rules on a Demo and Live account
You will have very few choices when it comes to demo testing in binary options. Open a small live account with brokers that give demo account to live account holders. You can then test the algorithm on demo and on a live account using the smallest trade size. You can then evaluate your algorithm and modify as desired.
Modifying the Rules
The markets will always evolve, so your algorithm must evolve with it. A static algorithm in an evolving market is a disaster on the make.
Conclusion
Algorithmic trading is indeed possible with binary options. In the next part of this article, we will elaborate on how to make your algorithm come to life in the binary options market.
