Folks - I have finally gotten the directions and template together for others who want to try out this testing on other instruments. I tried to write the directions and collection methods instructions out as fully as possible. If you have questions, by all means ask.
Overview of strategy:
This strategy is about the 3rd or 4th evolution of a proposed idea I had months ago. As I tested, and received Darrell’s guidance, it has morphed into what it is now…a decent strategy that is fairly automatic and has multiple permutations of taking trades.
The original impetus of this strategy was that I was looking at charts and the diagnostic deviation lines. I was focusing on the YM charts (just what I happened to be trading at the time) and noticed that there seemed to be a pattern developing when the regular APEX entry (3 tick breakout of E) occurred near a deviation level, in that a majority of the time, the underlying closed above (on a sell) or below (on a buy) the next half deviation level.
With that idea in mind, I wanted to try and develop a standard way of testing this that adhered to the normal rules of APEX pattern trading. So, I decided to put the following constraints on the entry: the entry had to be during a defined time (0800 ET to 1615ET), it had to be within a defined distance from the half deviation levels (essentially any deviation level other than the +/- .7 levels, including using the Settlement price as an entry level). That defined distance is +/- 25% of the daily strike width from a half deviation level. For example, YM daily binary strike width is 20 ticks, the “zone” is =/- 5 ticks around the dev levels.
What emerged is the APEX C and APEX C’ strategy.
The C strategy is SELLING an ITM strike .5 deviation ABOVE a valid GREEN APEX entry, or BUYING an ITM strike .5 deviation BELOW a valid RED APEX entry. A C trade is essentially saying that the trend of the trade will not go past the .5 deviation before it loses momentum. Here
“http://www.screencast.com/users/dca78_00/folders/Jing/media/db7a1887-ef24-4975-9d11-6f9b19a1ed1f”
is what it looks like. Disregard the writing in the boxes.
After some testing, it was realized that there was a valid reason to do the opposite trade as well, which is the C’ trade. The C’ strategy is BUYING an ITM strike .5 deviation BELOW a valid GREEN APEX entry, or SELLING an ITM strike .5 deviation ABOVE a valid RED APEX entry. This is the opposite of the previous screentshot.
Combining this strategy in essence becomes a butterfly binary strategy at strikes .5 deviation away from a valid entry.
Testing:
In order to do a proper testing of this system, I had to find a method of characterizing the behavior of the underlying instrument. That is where the LP, SP and P come into play. The LP is a characterization that the underlying never really moves towards our strike; it either hangs around our entry level or turns around and goes the opposite way. The LP characterization means that there is only a Little Premium in the trade. The SP premium means that the underlying has moved in our desired direction, but less than .25 deviation. The SP characterization means that there is Some Premium in the trade. The P characterization means that the underlying has moved at least .25 deviation in our direction. The P characterization means that there is Premium in our trade
“http://www.screencast.com/users/dca78_00/folders/Jing/media/5998c179-ec36-49b3-b2dd-192e0f3a5544”
.
The other data point that was needed to collect is the number of times the underlying “reached” our contract strike. This is the same as exiting an ITM binary when the underlying hits your strike price. As you can see in some of the data, a high reached number adversely affects profitability.
I made a spreadsheet that does all of the probability and profitability calculations. All that is required is to input the values into the columns on the left side of the spreadsheet that have a yellow box above them in row 1. There is a legend for what values to input on the bottom right of the spreadsheet under the profitability fields. Then on the probability and profitability side (right) the boxes that have to be filled in are the yellow boxes. The others automatically calculate for you.
In the beginning, I would recommend gathering just the probability data. Figure out what “regular” trading hour are for the instrument. For example FX pairs trade 24/5, but the majority of EUR/USD trading should be from London open to US close. That may change depending upon your expertise with the instrument and further testing. For example I found moving my “window” a little to the left of the US open I got some decent additional trades without unnecessary risks.
In order to get profitability you should gather a week’s worth of binary price data for your instruments. I took a screenshot of the price ladder every hour during the times I set, and then averaged the price out for each of the zones. Then I also recorded, the highest price paid for each zone, and the lowest price paid for each zone. Those 3 values for each zone are recorded into the profitability section (yellow boxes) and the sheet will do the calculations.
There are essentially two different strategic ways to trade this system, with two options each. When trading this system, you can either decide you are going to stay in a trade (Strategy 1) or you can exit when the underlying hits your strike (strategy 2). Then, under each, you can either place one $25 (buy at $75, sell at $25) trade when you get the signal, or try to capture the different layers by placing a trade for each of the layers (LP, SP, and P). So, in Strategy 1, Option A, when the trade is triggered I would place a working order trade for $25, and then let it ride. In contrast, if I was doing Strategy 2, Option A, I would put the same order in, and then babysit it looking to exit when the underlying hits the strike ($50). If I was doing Strategy 1, Option B, when the trade is triggered I would place a working order at each of the AVG risk levels values that I figured out from the binary price ladder and let it go until expiration. If I was doing Strategy 2, Option2, then I would do the same, but babysit it looking to exit when the underlying hits the strike ($50).
That should do it, if anyone would like to test this system out for themselves on other instruments. Results should be shared in the forum in this thread. As you will find out this doesn’t work as well on some instruments that “reach” more than others. Right now I am working on testing a follow on strategy that Darrell helped me with. Instead of buying/selling ITM binaries like we do here, I am testing buying/selling OTM binaries on the instruments that have high “reach” rates. The data collected in the spreadsheet is all that is needed to do both types. You just have to do another binary price ladder test on the OTM side. When I get that done I will post that here as well.
So, I hope some of you decide to help test this. I have tried to make the data collection as painless as possible (believe me when I say it was PAINFULL before).
If some of you decide that you would like to work on other instruments, take the spreadsheet, and let us know in the forum which instrument(s) you are going to work on to prevent duplication.
On a personal note, I would recommend doing this or making your own system. Really dig into it because your level of understanding of how binaries and the markets work is greatly improved after this type of work.
Happy trading!!!
Brad
Here is XLS FROM BRAD:
http://apexinvesting.com/wp-content/uploads/2013/12/TEMPLATE.xlsx
