Choosing the right trading strategy can be a difficult task. This guide, How to choose a strategy, will help you make the right decision.
To find the right strategy in the available wealth of possibilities, there are four main points that you have to watch for. When you understand these four points, making the right decision becomes easy. Learn all in our guide How to choose a strategy here.
Often, trading strategies are a complicated set of complex rules that are difficult to understand. When it comes down to it, however, there are four main criteria that allow for the classification of any strategy. With these four main points, you can make different strategies easily comparable and find the right one for you. Find out how to choose a strategy below:
The four main points are:
A strategy’s winning percentage indicates how many trades you will win if you use a strategy. With different strategies, the winning percentage can vary greatly, especially if those strategies use different types of binary options.
Strategies that use high / low options usually win about 60 to 70 percent of their trades, while strategies that use one touch options or ladder options only win about 30 to 40 percent of their trades, sometimes even less.
Since the winning percentage is only one of four factors that define a strategy, a higher winning percentage is not always an indication of a better strategy. One touch options and ladder options offer higher payouts that can make up for the lower winning percentage – but more on that later.
For now, the most important consideration about the winning percentage is the psychological implication. You have to ask yourself whether you could be happy with a strategy that would cause you to lose most of your trades. Due to the higher payouts of such strategies, you could still make money, but the psychological stress of being wrong most of the time is too much to take for many traders.
Strategies that win you a high percentage of your trades are somewhat easier to maintain for most traders. Losing four or five trades in a row – a common event with strategies based on one touch options – would only cause these traders to abandon their strategy and make bad decisions. On the other hand, there are some traders that enjoy the excitement such strategies offer.
Choose the strategy that fits your type of personality well. Do not be tempted by the well-sounding promise of a higher winning percentage if this type of strategy does not fit your personality.
Continue reading below the table…
As we already indicated, the average payout is strongly connected to a strategy’s winning percentage. Strategies with a higher winning percentage generally generate a lower average payout than strategies with a lower winning percentage.
In that sense, a higher payout is the reward you get for enduring the higher number of losing trades that comes with a strategy with a lower winning percentage.
Since any worthwhile strategy’s winning percentage and average payout combine to create a positive winning expectancy, the effects of the average payout are mostly psychological.
You have to ask yourself whether you would rather wait longer for a big reward, in which case you should choose a strategy with a high average payout, or want constant positive reinforcement, in which case you should choose a strategy with a lower average payout but a higher winning percentage.
Again, you should make this decision entirely based on which type of strategy fits your personality best and should refrain from allowing big numbers to trick you into a strategy with a high winning percentage if that type of strategy is not right for you.
To proof that you can make money with any type of strategy, consider a strategy’s winning expectancy. You can calculate a strategy’s winning expectancy by multiplying the average payout with the winning percentage. As long as the result is bigger than 1, the strategy can make you money.
As you can see, both types of strategy create a positive winning expectancy. Which strategy will make you more money depends on how well the strategy fits your personality.
The trade frequency is another important factor to a strategy’s potential profitability. Simply put, a strategy’s winning expectancy indicates how much money a strategy can make you over 100 trades, but the trade frequency determines how long it will take you to get to 100 trades.
Imagine two strategies with a positive winning expectancy. If one strategy creates 150 trades a month, but the other strategy only creates 20 trades a month, the higher trade frequency of strategy 1 will make you a lot more money.
As long as a strategy fits your character, a higher trade frequency is generally desirable.
The final factor you need to know in how to choose a strategy is how easy the strategy makes it for you to generate signals. If you are a new trader, choose a simple strategy. Complicated strategies that are based on many indicators and technical analysis will only confuse you, thereby resulting in negative results. Make sure to never use a strategy that asks you to do what you do not know how to do.