Market Replay and Binaries

#1

Looking for some suggestions as to how to do a Market Replay session and simulate using a binary pricing system.

#2

Jay - I have done a few binary strategies that I have posted in the forum, and let me tell you it isn’t as straight forward as spreads.

When I did testing of my strategies, there are really only 3 prices you can reliably count on: 0, 50 and 100. You are either going to make the full amount of the contract, lose the full amount of the contract and you know the strike will be worth around 50 when the underlying hits it. Those are the easy values to figure out, the rest not so much…

You have to figure out if you want to do ITM or OTM trading strategies, and what timeframe you want to trade. Time has a huge affect on the pricing, especially if you are doing OTM. I.e. on a daily OTM contract on an index contract, when I was testing, you would pay about 2.5X more in the morning then you would in the afternoon on average…that amount changes with if there is expected news, etc.

That being said…it isn’t impossible, just a little bit of work.

Here is what I did (not tooting my own horn, just helping you to not reinvent the wheel, plus I had a lot of help from Darrell and Mark):

  1. Figure out what your trigger event is and your trade exit strategy is for what you are doing.

  2. Calculate what the average move in ticks is from your trigger to exit

  3. Take snapshots of the binary price ladder for whatever instrument you want to trade (you will need sufficient data to make it statistically significant, personally I tried to get about 100 data points)

  4. Now, figure out what that average move from #2 above is “worth” in binary monetary value. So, if you find that your strategy averages 40 ticks, then you can figure out what a 40 tick move is worth on your binary ladder. You can use the binary scanner to do this as well, by using the simulate price range function. Just remember to do enough different times in order to make it a good average (news days vs. non-news days, etc.). I actually liked using the scanner after I did the screenshots to confirm that what I found my average price to be was what the market was offering.

  5. When you are doing replay, you need to know where the market has the strikes at, and this can be difficult over time. There are three ways to deal with this:

    • you can ask Nadex to send you the strikes for the day

    • you can collect the data yourself from the Daily Bulletin “http://www.nadex.com/content/dailybulletin.pdf”

    • you can figure out a percentage of where you think the strike will be based upon the strike width. For example, strike width on the Wall ST 30 daily expiration is 20 ticks wide. I figured if I placed a zone of 25% around where my trigger was, both above and below (50% total), then I would have a fairly reasonable expectation that there would have been a strike available somewhere in that zone to use.

With all of that data collected, it is just a matter of collecting the probability and profitability stats. Just remember, that this method produces an average price, which is essentially all we can do, and is good enough to see if a strategy is worth continuing further testing. The process should be: strategy development, backtest data test for probability and profitability, forward demo test to see if the live demo trades conform to our backtest probability and profitability statistics. All we have done here is the first two.

A few other things:

  1. Spend a good amount of time developing strategy and what additional trades that can be derived from an entry. Initially, I was all “I have an awesome OTM strategy”, did some testing, realized that ITM was a better way to go with the same triggers. Then after I did some testing realized that OTM does actually work better on some instruments. So, once you head down the rabbit hole, it is better to have an idea of all the different ways you can travel…
  2. Spend the most time setting up data collection. An XLS spreadsheet works wonders for this. Collect absolutely EVERYTHING that you think you need because data is data, and you don’t want to have to collect it again later. You can use the same data for an ITM strategy as an OTM strategy, you just have to flip it. By all means take mine “http://apexinvesting.net/forum/other-trading-systems-98/potential-apex-otm-binary-trade-system-using-deviation-levels-517-page8.html#.UshIN-pdVEE” and modify it if it works for you (post #76).

Lastly, I hope this helps you out. The greatest thing about doing something like this is that you will “understand” binaries a lot better. I used to trade solely spreads because I didn’t understand binaries. Spreads just made more sense to me, now I understand much better why binaries are better instruments to trade at certain times and in certain situations. Going through this process does make you a more mature trader…

If you need any help, by all means let me know.

Happy Trading!!! Brad

#3

Binaries are just delta - so if you know how to calculate delta of a option to expiration when using the correct IV you can come up wtih the binary price.

You will not have the strikes though.

Regarding the win/loss ratio that is pretty easy if choosing to expiration models simply using ITM/OTM binaries

To help with this you could record the nadex.com/results.html page each week as they post I believe a weeks worth of settlements so if you did this one time a week you would have all the strikes available and their settlements. (this will help a lot with accuracy on assumptions)

This would be very useful moving forward as you would have more and more historical data of strikes without assumptions and end results.

Also you can generally find what a binary is worth x distance from underlying with x distance to expiration at x time of day. The more of these data points you record the more realistically you can come up with the risk/reward scenario.

#4

Thanks Brad very helpful

#5

Thanks Darrell again very helpful, I am very part time active the Market replay option helps a lot.

#6

You bet. Anything we can help with let us know.