I learned a long time ago how to judge the duration of a given signal, well before I began trading binary options.The method I will describe is just as effective, even more so in some regards, for binary trading as it is for standard equity options. The first thing to do is to identify what your signal is. Is it a trend line bounce, a stochastic crossover, a shift in momentum, a candlestick pattern or a variety of signals as if the case with most profitable strategies today. Then, you go back over your charts for a given period and identify all the signals. It doesn’t matter what time frame you are using, this technique works in all.
Once you identify your signals mark the strong signals and weak signals and then count how many bars or candles it takes for each signal to move into the money. Once that is done you can take an average of the number of bars needed for the strong and for the weak signals to move into the money. These averages are now your base line expiry for you signal. If you are using a chart of hourly prices and your signal takes an average of 3.7 candles to move into the money you will want to use an expiry that coincides with that time. This could be a mid day, end of day, 4 hour or other option with an expiry that matches your signal horizon. If the signals takes 3.7 candles and you are using a daily chart that means 3.7 days, if the hourly chart 3.7 hours. Let’s look at the chart below. I am going to use a basic moving average strategy to illustrate my point. I will use the 30 bar exponential moving average because it hugs prices closer than a simple moving average and will give us more signals to count. Also, in order to weed out bad signals and to, hopefully, improve results, I am only choosing the bullish trend following signals.
So, there are 15 total signals; 6 weaker signals and 9 stronger signals. On average, it takes 4.2 bars for these signals to move into the money and PEAK OUT. That means, since this is an hourly chart, that each signal will move into profitability and reach the peak of that movement in about 4 hours. So for expiry I would want to choose the closest expiry to 4 hours that is available. If a good choice is not available then no trade can be comfortably made. Breaking it down a little the weak signals peak out in about 2.6 hours versus the stronger signals which take about 5.3 hours. Putting this knowledge in perspective, a weaker signal might be one that is close to resistance. A stronger signal might be one that is not close to resistance. Also, a stronger signal might be one where price action makes a long white candle and definitive move above or from the moving average whereas a weaker one might only create small candles and spinning tops.