A trading strategy is a specific plan that is designed to help to gain higher profits. There are plenty of them so it is crucial to choose correctly. A good strategy should be reliable and should fit individual needs as well.
This article answers some questions about testing digital options strategies. Why is it important? How to perform testing? Are there any tools that might help in this task?
When you learn the answers, you will be ready to test a strategy you wish to apply. You will know is it a good idea to use this particular strategy in this particular market or no.
The importance of doing the testing
Testing your digital options strategy is so important because it will assist you in choosing the one that is efficient.
There are so many strategies out there. A decision which one to choose can be confusing. And then, when you decide, there are still questions about the success rate.
Detailed testing will show you if this is a strategy which will help you make money. Moreover, it will indicate the areas where something is necessary to improve.
Without testing, you will be just hooting at random. Maybe you will lose an insignificant amount, like 1% of the total amount in your account, and you think you can continue with the very same strategy. But if this strategy is no good, you will soon lose more and more, until your account is empty. You do not want that. And testing will help you to avoid such a situation. It will show you what to change, where to improve and will it work long-term.
Carrying out the testing of the trading strategy
To determine whether the strategy is as good as you want it to be, you must calculate your winning expectancy. This value will indicate how worthy is this particular strategy. But even when it will be somewhat less than you desire, do not throw it in the trash at once. Maybe some adjustments can be made so it will serve according to your needs.
What is the winning expectancy?
The winning expectancy is the percentage of your winning transactions combined with an average total payout you receive for a winning trade. Let me explain it in an example.
An average return is 70%. Such a payout will bring you an average total return of 170% as this will be the return of your investment – 100% plus 70% return. 170% together. Your winning rate is 65% of all the transactions.
You calculate 170% of 65% and you will get your winning expectancy. It will be equal to 110.5% in the above example.
What the winning expectancy is telling you?
You do not want to trade with the options strategy which winning expectancy is lower than 100%. In such a case, you may expect, you will lose a lot.
If the winning expectancy is 100% precisely, you may lose and win the very similar number of times. This is an indication you should improve your strategy a bit.
You aim at the winning expectancy more than 100%. This gives you pretty good chances you will win most of the time.
Bear in mind, this information is just for you. It may not work for another trader the same way it works for you thus you cannot rely on someone else’s strategy with the winning expectancy higher than 100%. This happens because every person has a different trading style. Each trader has to decide for himself what is the risk he can take, what are the weak and strong sides of his trading and what strategy he prefers. Someone is better with the candlesticks patterns and another person can be best while trading based on some specific technical indicators.
Therefore, an important thing is you should always test a particular strategy for yourself. You must calculate the winning expectancy alone.
The steps to take to test digital options strategy
- Use the strategy you want to test during a certain period of time.
- Write down all the results you make that is what is the return rate, do you win or lose.
- Calculate the percentage of your winning trades.
- Calculate an average payout for your trade. This should be performed only from the winning ones.
- Calculate the winning expectancy.
Act accordingly to the result from the 5th point. If it is below 100%, adjust the strategy, trade some more with it and repeat the steps. If you get over 100%, you have just discovered a strategy that will work well for you.
A handful of tips
An Excel file can really make your life easier. If you do accounts there, some calculations will be automatized. Moreover, you can have it always on hand and review if needed.
Keep the data even if you receive the winning expectancy higher than 100%. You will be able to control the development and make the necessary changes on time.
Also, perform testing on multiple trades. 10 or 15 is not enough. In order to receive valuable trading results, you have to take into account at least 50 transactions on the very same strategy. Or even better, 100 trades.
It is an excellent idea to use a demo account for testing digital options strategies. Check with your broker if he provides one. A demo account is the one where you receive a demo currency instead of investing real money. You still get access to all the tools and indicators, but your transactions are really free risk trades.
Using a demo account to test the strategy
You should definitely use one if you had just begun your journey in the trading world. You do not take any risk, but you will surely learn a lot. You may try different approaches and find out what type of trader you are.
If you are professional, a demo account can be still some help. You may want to introduce adjustments to a preferable strategy and try it there without any risk. Or you can play with the bigger amounts and see how you feel about it.
A demo account is quite transparent in a way that you just have to check the available balance to know if your strategy works well or wrong.
The rules for using a demo account varies from a platform to platform. Some brokers do not provide such a feature. Sometimes you are allowed to open a self-existent demo account, but on the other occasions, you must open a live account first. The amount of demo currency that is offered also varies on different platforms. Some brokers give you just a small amount to play with, some give you pretty a lot. And the investment amount per trade can be distinct as well.
Always check what your broker offers and what are the rules. You should easily find it on the websites. If no, you can contact the support team and ask what you need to. This can be an additional test of their engagement.
Testing digital options strategies is absolutely essential to bring forth success. And with the help of a demo account, you can do it completely for free. You can test as long as you want to and find a perfect strategy. This will protect you from unnecessary loss. Only move to the real account when you feel ready for it.
Even when you are already trading on the live account, do not stop testing the strategy. The process should continue all the time, so you avoid random mistakes and are always in control.
Check the brokers thoroughly before you trust them with your money. We have created a long list of the brokers you may be interested in.
All the best!