2
$\begingroup$

Let's say we have a Binary Options 5-minute trading strategy that relies on multiple indicators and exploits price reversals in currency pairs. Now let's say there is a combination of inputs for the strategy's indicators that work really well together and produce a 65% average win rate when backtested against three years of minute-by-minute tick data.

In theory, can we expect this strategy continue to produce a 65% average win rate?

For one of the indicators, we use a Polynomial Regression Channel of length 250. This tells us when the price spikes outside the recent average price range and thus offers a clue as to when the price will likely reverse.

In testing such a strategy, I have noticed that some days it performs extremely well (sometimes yielding a 75% win rate with 12/14 trades winning) whereas others it bombs (20% win rate with only 2/10 trades winning).

$\endgroup$
3
$\begingroup$

In testing such a strategy, I have noticed that some days it performs extremely well (sometimes yielding a 75% win rate with 12/14 trades winning) whereas others it bombs (20% win rate with only 2/10 trades winning).

This is the key. From the information you provided it would appear that you have failed to consider the effects of draw-down.

The strategy will most likely fail when you factor in capital draw-down

For example: You have $100 and invest it in this strategy.

DAY:

  1. You hit jackpot, yielding you 12 trades that make you 10% each and you now have $314!
  2. You hit a wall and have 10 trades that loose about 20% each today you now have $27
  3. Now with $27 even if you make 20% off of every trade it will take you more than 13 trades to make back what you lost in just 10 trades

The market can move against you longer than you can stay liquid.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.