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Creating a profitable binary options trading strategy is not an easy task. It is even more difficult to create a strategy that shows the same results under any market conditions. In any case, you will have both profitable series of trades and unprofitable ones, since it is impossible to foresee all possible scenarios in advance.
Let’s say you have a working strategy with 60% winning trades. Of course, this figure will not impress anyone. Beginners often dream of some kind of grail without losing trades at all, or at least with a probability of making a profit of more than 90%.
However, in order to increase the probability of making a profit on one strategy, even from 60% to 70%, you will need to make an incredible amount of effort. Roughly speaking, there is a certain limit, after which further attempts at improvement become unprofitable, since the potential of the idea underlying the system has been exhausted. That is, all further improvements will require an order of magnitude more effort.
The way out is to create and apply a Portfolio of Strategies . We will talk about this today.
Thus, it is much more profitable to leave the strategy as it is, but add one or more others to it to compensate for the risks. You’ve probably heard the expression about storing eggs in different baskets. So, in our case, a basket can be either one strategy traded on different instruments, or a whole set of strategies based on different types of analysis.
Actually, the main task in drawing up a diversified portfolio is to select weakly correlated strategies. At the same time, in order to achieve the maximum diversification effect, the share of investment in each strategy should correspond to the estimated risks.
Even a well-developed strategy remains vulnerable to the market during the testing phase. There are no constantly earning strategies and, sooner or later, a period of losses will come. In the worst case scenario, you will get a long series of losses, which will lead to a significant drawdown of the deposit. However, the performance of such a strategy is easy to predict, in contrast to the performance of a portfolio.
The picture shows the profit charts of two different strategies. One almost immediately goes into a drawdown, the other shows profit only in the first half of the test period. In both cases, we get an unstable result.
The combination of different trading approaches in one essence, especially if they are slightly correlated with each other, gives us a significant advantage over the market. In this case, the loss on one strategy is fully offset by the profit on the other. The resulting profit is added up, and as a result, we get a stable profitability chart without significant drawdowns.
Also, it is worth considering the worst case scenario when all strategies in the portfolio show a loss at the same time. For a properly composed portfolio, this is not a problem, because even if the loss is added up, we, in the end, still get less risk than when trading the strategy alone.
The fact is that for each strategy it is required to allocate a strictly defined share of funds. The more efficiently the strategy works, the more priority we give to it. Thus, we invest the least amount of funds in the strategies that show the largest loss, and we invest more in the most profitable strategies.
- Portfolio creation from different strategies
The first and most obvious solution would be to combine different strategies. For example, a flat strategy is known to drain during a trend . The trend line, on the other hand, will make money during prolonged directed movements, but will bring a loss on the flat.
This approach allows us to trade according to the current market picture, regardless of the current state of the trading instrument. There are, in fact, much more mutually exclusive models. For example, we can combine a strategy that trades reversals with a strategy that trades corrections in price movement. That is, we combine several working approaches that interpret the current market situation in different ways.
- Portfolio creation from different instruments and TF
The second approach is to use different tools. This is a classic example of diversification, where we expand our arsenal of tools within one or more markets. Each instrument has its own unique behavior, and the price is formed due to various and often not overlapping factors. The greatest advantage, of course, can be obtained by using the instruments of different markets .
Here you need to take into account the seasonal patterns of different currency pairs and other instruments. It is best to select tools that are not highly correlated with each other. We have a tool for determining seasonal patterns of currency pairs on our website .
It is also known that different patterns operate at different fractal levels. That is, the same strategy on the minute and daily charts can show a radically opposite result. We can use this feature to our advantage. To do this, we determine on which TF the strategy performs best. Based on the results of testing on history, we select the best TFs, on which we will trade.
- Combining strategies into one entity
The next approach is to use weighted signal tactics. There are many TSs that are very similar in nature. It makes little sense to combine such strategies, since this will only lead to unnecessary complication. It makes sense to combine strategies using different approaches. For example, one is using an indicator , another is a foundation, a third is patterns, and so on. That is, we receive a set of signals from different sources and, on their basis, make a decision to enter a position.
The danger is that we can complicate the vehicle so much that it will end up causing a loss. To prevent this from happening, you need to carefully monitor which filters we use and how compatible they are. That is, if we, for example, forecast a strong increase in volatility , using fundamental analysis , we can only reinforce this signal of a display , for example, AI slope or channel narrowing Bollinger . If you try to combine strategies that work on mutually exclusive ideas, the signals will conflict with each other and none of the strategies will be able to work normally.
Building a portfolio of strategies is a smart way to improve the results of an already working system. If perfecting the very tactics of trading can take a lot of effort, then using several strategies as one entity will help you erase the shortcomings of a particular trading tactics. With proper risk management, you can reduce the overall drawdown and, accordingly, get the best return to risk ratio on binary options.