Thanks for the reply and help. I would recommend that every one of your students try and figure out something like this because it really does help you understand the APEX pattern and binary pricing, among other things. My 2 cents…
The reason I added trade A was because the worst case would be a risk of $60, which gave you a negative profit (-$120). Many of the trades would have been filled for less risk (47-53) which would have made it profitable. I just have no real way of modeling binary prices over time, the only thing that I know for sure is that when the underlying is in the entry range, the most I have seen an ITM binary cost is $60. For example, on this small sample size if the average risk was $50, then it would have been profitable ($200). The break even risk is around $56.50 per trade. So, with a larger sample size, if the probability of success goes higher by even a couple of points, then the max risk that I saw of $60 would be profitable.
Granted, a larger sample size could just as easily make the probability less… But, since I have to plot the ranges and everything, it isn’t too much extra to see.
Okay, here is the reasoning on Trade C. It grew out of the flipping my original plan on its head. When there is a trade signal (green APEX, 3 tick breakout of E bar in 25% range of any half deviation), I SELL a daily expiration ITM binary near the next higher half deviation level (which is what I was originally targeting as an OTM buy). So, if the green APEX entry was near Settlement, I would SELL an ITM at the 0.5 dev level. If the trade signal was at the 0.5 level, the ITM would be near 1.0. So far, 100% of the time the underlying price will not expire at or above this level.
When there is a trade signal (red APEX, 3 tick breakout of E bar in 25% range of any half deviation) I BUY a daily expiration ITM binary near the next lower half deviation level. So, if the red APEX entry was near Settlement, I would BUY an ITM at the -0.5 dev level. If the trade signal was at the -0.5 level, then the ITM would be near -1.0.
I added a chart HERE
“http://www.screencast.com/users/dca78_00/folders/Jing/media/db7a1887-ef24-4975-9d11-6f9b19a1ed1f”
.
As far as the pricing goes, when the trade is triggered, the ITM binary is going to be expensive because it is nearly a half deviation away. So, it is probably in the $90+ risk. While, with the limited data I have it is 100% probability that it will not expire OTM, I was trying to get a better price. One of the things I have noticed is that the risk in a binary reaches about $70-80 when it is halfway between the half deviations (depending upon time of day). So, in the 32 trade data points, 19 of the trades made a significant move towards the ITM Trade C binary strike, where I could get a better price (lower risk). In the other 13 trades, they never made much of a move towards the ITM Trade C binary strike. So, when the trade is triggered, I could put in an order to buy the ITM at $75, or sell the ITM at $25. Since the risk would be higher, it would sit in the working orders until the underlying moves and the binary is priced accordingly. In some cases, the underlying actually hit in the ITM range, where the risk would be ($47-53), but it always (so far) has expired ITM. Conceivably, you could layer orders in at every $5 risk reduction when the signal is given ($95,90,85,80,75,70 risk, etc…
Now, the difficulty is what to do when the underlying reaches the Trade C ITM binary strike. There were 4 trades where the underlying actually reached the ITM range. If you had exited the trade (like you teach) we would have lowered our profit from $475 to about $375. Still, very acceptable. But, if over time, there are only a couple of trades that actually end OTM, it would be interesting to look and see what the results would be if we don’t exit and hold the binary until expiration.
I hope that explains it well enough. Do you have any way of sending me past deviation levels? I know NT only plots 30 days of them, but do you have historical databases of them? Do you think 6 months of testing would be enough to make sure that it is a viable system?
Thanks,
Brad