Modeling Binary Options Payoffs in Forex Backtests
Summary
The question examines whether binary options can be represented in a Forex backtest. The trader describes tracking virtual up or down bets with an expiry and stake, then counting wins, and asks about proposed alternatives: using take-profit and stop-loss orders or adjusting lot size to imitate a fixed payout. The document does not establish that either workaround is valid; it frames them as ideas that have not worked or whose practical behavior is uncertain.
The central modeling distinction is that a binary option settles according to whether the underlying price is above or below its strike at expiry, with a fixed payout, while ordinary Forex positions produce profit or loss based on price movement and position size. A faithful simulation should therefore evaluate the expiry condition directly and book the option's specified win or loss to an account balance. The document offers no test results or detailed settlement model, so details such as payout terms, costs, and execution assumptions remain unspecified.
Key ideas
- A binary option outcome depends on the underlying price relative to its strike at expiry.
- A Forex take-profit or stop-loss does not inherently reproduce a fixed binary payout.
- The proposed lot-size adjustment is posed as a question and is not validated by evidence.
- A simulation should represent the binary settlement rule and payout directly.
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Full text
# 85684 # On a platform that only supports Forex (etc.) backtesting and not Binary Options (on a Forex asset), is there a mathematical model to embed it? So, I'm using MetaTrader5 to get data and form a Binary Options bot, but to backtest I've just been keeping track (within my EA code) virtual binary Up/Down orders paired with expiry and bet amount. And if it turns out to be a winner, then incrementing a counter. Then periodically displaying win rate on chart. However, to be sure I'm not deluding myself into thinking I've got a winning EA for binary options, I thought there might be a way to backtest it in a Forex environment. I googled and the AI gave a trick using Stop-loss and Take-profit: Make the following changes to the EA. If it's already making fake / representative forex orders, change them like the following instructions to make them accurate models of our BO orders. > Step 3: Handle the Binary Options "Fix" in CodeBecause MT5 will output a Profit/Loss in pips (rather than fixed binary payout percentages), you may need to make minor tweaks to your EA’s code (in the MQL5 Editor) depending on how it's written:Ensure your EA has fixed Take Profit (TP) and Stop Loss (SL) logic. In binary options, a win or loss relies strictly on whether the price closes higher/lower than your strike price at expiration.Set your EA’s TP to the number of points that equate to your desired "Payout Ratio" so the backtesting report's mathematical equity curve aligns with a binary options math model. However, I'm not finding it to work. But I thought why not this. Forgetting SL/TP for now. Set the lots $L$ so that the amount I bet is equal to $\\\$0.92$ (the payout on a $\\\$1$ bet that wins in binary options), then if it truly wins, we should be able to take the new lot aount $L'$ and form the error $E_L = L' - L$, and make some obviously-going-to-quickly lose bet of $E_L$ lots and then it would settle quickly and I should have $92$ cents from winning the bet. And of course do the opposite if I lose bet. However, is this method actually going to work in practice? Is there a better, more robust way to model Binary Options in a pure Forex backtesting environment?
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