Evolving and improving your trading performance for binary options requires an ongoing commitment to evaluate one’s own performance. Up to this point, this book has navigated through many strategies and tactics for trading binaries. The challenge is whether you have improved your skills. This chapter reviews key performance metrics that can guide you as you evolve your trading.Key Performance Metrics:
There are many variables involved in such evaluations. The following are some useful categories to keep in mind.Win/Loss Ratio:As discussed earlier, the ability to become profitable is really a two-part equation. All levels of profitability ultimately relate to a win/loss ratio and an average profit/average loss ratio. The result is a personalized profitability curve that describes whether the trader is profitable and whether the trader is stable in maintaining profitability. Ask yourself after conducting a series of trades (10 or more):
What does my profitability curve look like?Adjusted Win/Loss Ratio:Ask yourself, what would happen to your performance if you removed from the calculation the best-winning and the worst-losing trade? This is called the adjusted win/loss ratio and adjusted average gain/average loss. It suggests a more realistic performance result than the original win/loss and average gain/average loss ratios. Don’t be fooled by one great trade or one great loss.It’s the adjusted win/loss ratio that is more indicative of your actual core skill level.Near-Miss Ratio:
In binaries, if you win by just the smallest margin, you are a winner and the same goes for losing by the smallest margin. This is why it is a good idea to measure how big your wins and losses are. If you win by large margins, then your confidence in the strategy you used can be reliable. If you lose by large margins, you can consider it a clue to improve your strategy. Therefore, count the near misses as a percentage of the win/loss ratio.
The goal is to have as few as possible near misses and bigger size wins.Distance from Breakeven When all is said and done, it’s about profitability. The goal, however, of getting profitable first requires getting beyond the breakeven point. A breakeven score is a very significant milestone. It means the trader is very close to profitability.Perhaps, it may be only a few changes, and profitability becomes more common.
What is the key to breaking the breakeven barrier? It is consistency. The trader who is consistently wrong can at least identify one or two reasons for the performance problems. A trader who is flipping from profits to losses has a more difficult ability to diagnose the causes of their losses. Understanding the stability of your trading record is a key piece of information. What is the risk of ruin? What is the risk of losing your profits?
Is it coming from one or two bad trades, or is it related to a strategy?A first approach in evaluating one’s performance and your risk exposure to losses is to determine how many trades it takes to break even .Another way to look at this is to understand that the path to profits must first cross the breakeven barrier. The following table shows costs per trade,maximum profit per trade, and maximum loss per trade .
For each combination of these three, there is a number of winning trades it takes to reach a breakeven point. In other words, any number less means that the trade is not profitable. For example, if a trader buys a $95 binary option, it will take 19 winners to offset one $95 loser!Win/Loss Duration:Over time, each trader develops a personalized pattern and style of trading.There are patterns within the winning trades, as well as the losing trades, that provide important clues on how to improve performance. The duration of the trade is a key metric.
How long is your average time in a winning trade? How long is your average time in a losing trade? This will tell you a great deal about your psychological profile as a trader. If you are a set-and-let trader, you will have long duration trades. If you are on the other side of the trader-style continuum,you will have short trades, revealing a frenetic trading personality.It’s important to note that there is no good or bad connotation with your trading personality; it is a clue as to how to improve your trading. What is also important is a change in your style. If the distribution of your trades shows trade duration all over the place (multi-modal), it indicates you are either a very diversified or a very confused trader!