Correlation strategies and binary options
This approach has been shown to be approximately ninety percent accurate; providing you know what you are doing. The theory behind this strategy rests on the fact that many items traded on the stock markets will have a correlation to each other. There are two main types of correlation; the first is when two items of stock generally move in the same direction, the second is when two items of stock generally move in opposite directions.
When stocks items move in opposite directions they are known as a negative correlation. Once you understand this theory you will be able to locate assets which move in this way, there are a number of currencies which generally move in the same direction and precious metals will also often display this trend. The best way to trade with this strategy is to place two trades at the same time, one on each of the correlating assets.
The trades should be viewed as separate transactions; each one will provide a return or a loss. Ideally they will both move in the expected direction but if only one does you will either minimize a potential loss or still manage to make a profit.
It is this approach that can make it a very successful strategy. Perhaps the greatest benefit of this approach to binary options trading is that the tactic can be used on any type of asset. Some experts even recommend that you use two different accounts as this then becomes a more efficient and effective strategy.
Of course, as with any strategy there will be some risks or disadvantages. The biggest issue is that this cannot be used as your main trading option. It is an excellent way of supporting your investments and minimizing risk, but it will always need to be part of a bigger strategy. This should not put you off using the strategy, it can be used to help reduce losses or to extend your investments at just the right time without overstretching yourself. It will take a little practice to get the technique right, but once you have mastered it you will find it an invaluable help; done correctly this tactic will increase your return on investment.
The price of crude oil is dictated by forces of demand and supply. Demand for crude oil is driven by growth. Growth will need more crude oil and its derivatives to fuel expanding industries and all that come along with it.
Supply is determined by the quotas set by producing countries, as well as availability of the product if there is a major crisis in countries where it is produced. So what is the correlation play here? The USD will be negatively affected by higher oil prices. This is because the US is a net importer of crude oil, and more money spent on crude imports will increase the US trade deficit, which is a USD-negative event.
Weaker oil prices mean that less money will be spent on crude imports by the US, reducing the trade deficit a USD positive event. Therefore, the trader can trade the change in crude oil prices on the binary platforms as follows:. This allows the interplay between the USD and crude oil to fully manifest itself. Gold and Inflation Gold has traditionally been treated as a safe haven asset which traders buy into in times of economic crisis, or in times when market participants are in capital preservation mode.
However, when capital is depleted as it will be if the crisis lasts long enough , traders may then trade in their gold stores for cash, leading to a gold sell-off. So it is not a wise idea to trade gold simply on expected demand during crisis periods in the financial markets. Rather, it makes more sense to trade gold as an asset correlated to inflation.
This is because gold is better used as a hedge against inflation and not just as a safe-haven, capital preservation asset. Central banks commonly use interest rates as a way to defeat inflationary pressures. So whenever there is an expectation of inflationary pressure on the economy of a country, it brings an expectation that rates will go up. This brings on a risk-on sentiment to the market, with traders willing to back up such expectations with an increase in gold demand.
This is because gold and the USD are inversely correlated. For the binary options trader, watch the inflation reports coming out of Australia and the US, and also watch the Reserve Bank of Australia RBA statements regarding their plans with regards to interest rates, looking closely at the concern they have over inflation.
If you see a hawkish tone in the statement following a rate decision increased or left unchanged with a chance for increase in future , get ready to make a technically-directed entry into gold or the AUDUSD on the CALL side of the trade.