Binary Options Systems

What makes a good binary options system? For many traders, this question is almost impossible to answer. Luckily, there are a few concrete criteria for a good binary options strategy or free systems yourself. This article will outline these criteria and show you how to build good strategy based on them.

  • Three Criteria Of A Good System
  • How To Create A System That Works

With this information, you will be able to understand which criteria a good binary options strategy must fulfil, and how you can get there. You will also be able more realistically to evaluate systems offered on the internet and other places.

Three Criteria Of A Good System

There are thousands of systems for trading binary options, but every good system fulfils the same three criteria. Understanding and applying these criteria to your own approach is the best way of developing a free, money-making trading style for yourself.

Here are the three criteria of a binary options system that works:

  1. Repeatability,
  2. Comparability,
  3. Improvability

Any system that fulfils these three criteria will sooner or later make you money. While these might not be the criteria you read in most trading books, they are the criteria that really matter. To understand why let’s take a look at each criteria individually.

Criteria 1: Repeatability

Repeatability defines the characteristic of a strategy that it always gets you to do the same thing in the same situation. A strategy is repeatable when it clearly defines which assets you analyse, how you analyse them, and what you do once you find a trading opportunity.

To achieve this goal, your system must be free from human factors. There is no room for gut feelings or hunches, the only thing that drives your decision can be cold, hard facts.

Repeatable systems are based on indicators. For example, a strategy based on the Relative Strength Index (RSI) could define that you invest in falling prices when the RSI reads more than 80 and in rising prices when the RSI leads less than 20.

Such a system would be perfectly repeatable.

  • For every reading over 80 and below 20, you know how you would invest.
  • For all readings between 79 and 21, you would stay out of the market.

There is no grey area and no room for personal judgments. Faced with the same value, you would always do the same thing.

Repeatability is so important because random trading is the number reason why traders lose money. They follow their gut feelings, and sometimes they will make some money, and sometimes they will lose some money. But they will never know why. After a while, they will face a loss significant enough to wipe out a large part of their account balance. Coming back from this loss will be impossible.

Repeatable systems take the guess work out of your trading. Because you always do the same thing, you know whether what you are doing works. This brings us to the next criteria for a good binary options strategy: comparability.

Criteria 2: Comparability

Our second criteria directly builds on our first one. When you have created a repeatable system, you can compare it to other repeatable approaches. Here’s how you do that:

  1. You calculate the winning expectancy of each system.
  2. You compare the winning expectancies of multiple trading systems.

The winning expectancy is the factor of your strategies average payout and total return. The total return is the average payout plus 100 percent because you also have to factor in that you also get your initial investment back.

For a system that wins you 70 percent of your trades and gets you an average payout of 65 percent, the winning expectancy would be:

70 percent x 165 percent = 115.5 percent.

This value tells you whether a system is good enough to make you money. It calculates how much of your original investment you get back on an average trade.

  • A winning percentage over 100 percent indicates that you make money on an average trade.
  • A winning percentage below 100 percent indicates that you lose money on an average trade.

You can compare the profitability of multiple strategies by comparing their winning percentages. A method with a higher winning percentage will make you more money than a system with a lower winning percentage.

Comparability is especially important when you try to improve your appraoch. After every modification, you can compare the new winning percentage to the old one.

  • If your modifications improved your winning expectancy, keep them.
  • If your modifications decreased your winning expectancy, go back to your original strategy.

Comparability is such an essential characteristic of a good binary options systems because it allows you to get better. When you try something new, you can avoid having to judge the changes based on feelings. You have hard facts that help you decide which way is better.

This brings us to the third element of a good trading methods: improvability.

Element 3: Improvability

Improvability is the final characteristic of a good strategy. It combines the first two criteria and builds on them. Improvability is the most important criteria of a trading system, but it would be impossible without the first two.

This statement might surprise you. After all, we could simply say, “A good system is a strategy with a winning expectancy over 100 percent.” After all, such a strategy would make you money.

Review Your System

But what do you do if your method fails to achieve this value? How do you get better? And what if you made money but suddenly start turning a loss?

Improvability is your autopilot to trading success. When you know how to improve your strategy, its initial winning expectancy is unimportant. After a while, you know that you can get the winning expectancy over 100 percent. Even if you should slip into sloppy trading and start losing money, you can always improve again and fight your way back out.

An improvable system is sustainable, which is why it is the only type of approach that can achieve long-term success.

How To Create A System That Works

The three criteria we have discussed are simple to understand but difficult to apply. How do you create a system that is repeatable, comparable, and improvable? To answer this question, we will now translate the three elements into concrete elements that you can add to your strategy, too.

To fulfil the three criteria for the best binary options system, your method must have the elements:

  1. A trading system,
  2. A money management system,
  3. An analysis and improvement regime.

Let’s take a quick look at each of these elements and see how you can integrate it into your strategy.

Element 1: A Trading System

A trading system defines which assets you trade and how you create trading signals. Because binary options are short-term investments, a trading strategy for binary options must be based on technical analysis.

Technical analysis uses indicators that predict what will happen to the price of an asset in the future based on what happened to the price of the asset in the past. There is an almost endless amount of indicators, ranging from mathematical indications such as oscillator values to indications based on pattern recognitions such as trend analysis.

Fundamental aspects such as the economic future of a company are unimportant when you predict what the price of an asset will do over the next 15 minutes or one hour.

Clearly define which indicators you use for your system and when you invest. With this step, you have fulfilled half of each of the first two criteria – repeatability and comparability. For the second half, you need our second element: a money management strategy.

Element 2: A Money Management Strategy

A money management strategy defines how much you invest in every single trade. A good approach uses a percentage value of your overall account balance, ideally between 2 and 5 percent. With an account balance of £1,000, you would invest between £20 and £50.

With this type of strategy, you trading becomes fully repeatable and comparable. You invest the same percentage of your account balance in every trade, which means that every trade bears the same weight.

With a strategy that always invests the same amount of money, this would be different.

  • As your account balance grows, each single trade becomes less meaningful to you.
  • After a losing streak, every trade becomes more meaningful to you.

This is a problem because no two trades are completely alike. Even with a clearly defined strategy, you will trade at different times of the day, in different moods, and in different market environments. You want all of these things to have the same effect on your overall success. Otherwise, you would sooner or later encounter a situation in which most of the weight falls on lost trades, and you could lose a lot of money.

The key to long-term success is not losing money. As long as you always make money, you will get continually richer. That is what it is all about, and why you have to accept that the worth of a trade to you is not measured in absolute terms, it is measured relative to your overall account balance. A good money management strategy reflects that.

With this type of money management, you can survive losing streaks and continually grow your account balance when things are going right. Of course, you need a strategy that is good enough to make you money. The next element of a good binary options strategy will get you there.

Element 3: An Analysis And Improvement Regime

An analysis and improvement regime guarantees that you will eventually create a system that can make you money. It helps you identify the things that make you money and eliminate the things that cost you money.

An analysis and improvement strategy must be something that helps you understand the results of your past decisions. The precise form is up to you, but the thing that has helped the most traders is a trading diary.

In a trading diary, you write down every characteristic of a trade. This includes such things as:

  • Why did you make the trade? Which indicators did you use? How did you interpret these indicators?
  • How did you make the trade? Which binary options type did you use? Which expiry? Which asset?
  • Where did you make the trade? Which platform did you use? Where were you? How did you feel?

Feel free to extend this list in any way you consider necessary.

After a while, you can come back to your trading diary and compare your past trades. This analysis usually creates some interesting insights. Often, you will find that you are the most effective when you trade in a specific place, at a specific time, or in a specific mood. By simply always trading in this place, mood, or time, you can increase your winning percentage and your profit.

Similarly, you will likely find that a special type of asset, expiry, or binary option works better for you than others, and you will be able to identify the indicators that work the best for you. Step by step, you can focus on your strengths and improve your trading.

These reviews are so important because almost nobody starts out with a perfect strategy. At first, we all make mistakes or trade in ways that are a bad fit for us. Therefore, it makes sense to have a plan for how to get better. Eventually, you will be able to trade profitably. Creating a free trading system is not straightforward, and as it develops, it needs regular reviews to keep it on track.

Systems Take Time

The process that we laid out takes time. During this time, you will make rookie mistakes and encounter some losses. To survive this learning phase without going broke, you can use a demo account.

Most binary options brokers offer demo accounts that offer you all the features of a regular trading account but allow you to trade with play money instead of real money. They create the risk-free environment in which you can develop your free system without having to fear for your money. We recommend starting with a demo account to all newcomers.

Even if you should find that binary options are not the right investment tool for you, you can learn this lesson for free with a demo account. Either you find a great way to make money, or you will have some fun for free – either way, you win.

To find the right broker and the right demo account, take a look at our broker top list. There, you can find all relevant brokers and their features in a comprehensive table.

Final Thoughts

A good binary options system is repeatable, comparable, and improvable. Use a trading system, a money management strategy, and an analysis and improvement regime, and combine them into one system. Building your own system, free, gives you greater freedom than relying on another provider.

Over time, the combination of these three strategies will help you to trade profitably. With a demo account, you can accomplish this step completely risk-free.