Is Binary Options Currency Correlation important Read here!

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Binary Option Correlation Strategy | Forexing24

Binary Option Trading Correlation Strategy combines other strategies stressing the fact that it is a secondary and complementary strategy. There is a strong correlation between some assets that includes the prices of expensive metals such as gold and silver. There are two types of correlations i.e. positive and negative correlations. We see quite often that the prices of the correlated assets rise and fall concurrently and unidirectional. For example, the Euro and Swiss Franc frequently trend in identical directions. It is termed as the positive correlation. There are several negative correlations too, where the price of two assets moves in opposite directions. Markets do not always trend in the same direction irrespective of currencies, indexes or raw materials.

Binary Option Correlation Strategy

Correlation Strategy is considered as pone of the most important strategies for finding entry points for making trades. There are certain assets in the binary options market that share correlations with other assets. This correlation helps in predicting the movement of one asset based on the performance of the other correlated asset. It solely depends on the proficiency of the traders to recognise the trends, establish the correlation, and trade successfully. Correlation indicates the similarities between the performances and the overall trends of the two datasets. The stronger the correspondence between the two assets, the better is the probability that a system will perform adequately in analyzing and predicting the market trends.

Certain assets in the binary options market share correlations with other assets and market occurrences, making it possible to predict the movement of one asset based on the performance of its correlated asset or event.

Examples of Correlated Assets

The following assets are seen to be closely correlated, and so will present correlation-based trading opportunities in the binary options market.

  • China and the AUDUSD
  • AUDUSD and Copper
  • EURUSD and Crude Oil
  • Gold and Inflation
  • Sovereign Debt and Currencies

Pair Options

A new kind of binary options has been recently launched in the market, called as the pair options. Its purpose is to exploit the benefits of correlation. Pair options enable the traders to appreciate on the relative performance of correlated assets. It activates one of the trades and enables the traders to know about the other. These pair options allow the traders to construct viable strategies to maximise the profits. The estimate of the correlation is based on a particular period and exposes the direction and degree to which two variables are associated. It is important to remember that this relationship changes over time imposing a substantial need for the traders to review their strategies regularly.

Correlation Coefficient Strategy

These strategies are based on the concept of correlation. In this strategy, the traders need to appreciate the movements in the direction of the highly correlated assets. Once, the trends are recognised, and the traders can gain immense success over trade. These strategies also provide the opportunities to profits in trade irrespective of the ad direction of advancement of the market i.e. upwards, downwards or sideways. In strict terms, correlation quantifies and monitors the degree by which the first asset advances on the other. The scale of the coefficient of correlation ranges for -1 to +1. A positive correlation is identified by the positive coefficient whereas the negative correlation is determined by a negative coefficient. As the correlation declines to zero, it should be noted that the directional price movements of the assets have become less oriented. Correlation readings are only considered significant if the value of the coefficient ranges between -0.7 to +0.7. The values that lie outside this range indicates less relevance as they are not strong enough correlations to take important trading decisions.

What Is the Correlation Strategy?

The correlation strategy is a binary options trading strategy in which traders look for assets with correlating data. There are three different types of correlations most traders look for. Those include…

  • Product Correlation – With this strategy, traders look for products or news that ties two assets together. For instance, a cell phone manufacturer may give exclusive rights for their phone to a cell phone provider for a specific period of time. In this case, both the manufacturer and the provider would experience notable changes in their value.
  • News Correlation – Often times, big news will focus on multiple assets. For instance, there may be a class action law suit against several cell phone providers for misrepresented billing. In this case, all providers would most likely lose value.
  • Asset Correlation – Finally, we have asset correlation. This is when the movements in the value of multiple assets generally correlate with each other. For instance, currencies that are backed in large by commodities like gold will generally fluctuate as the backing commodity does. So, if a currency is backed in large by gold, when the value of gold goes down, you can predict that the value of the currency will follow.

Many assets are closely correlated. Some of them have been described below:

AUD/USD and Copper

This is a prime example of correlation between currency, commodity, and an economy. It is because China is the largest buyer of Australian copper. This correlation is a positive one. It provides an alternative to the traders to opt for copper binaries if they are not interested in trading the AUDUSD. It is advised for the traders to look for the close correlation between AUDUSD, copper and the Shanghai Index, and the occasions when this relationship disintegrates too.

Gold and Inflation

Gold has always been considered as a safe asset in times of economic crisis or when the traders are in the mode of capital preservation. In cases of elongated depletion of capital, the traders trade in gold. It is advised to trade gold as a correlated asset to inflation. In this way, gold can be used as a hedge against inflation. Australia is the world’s largest producer and exporter of gold, so its currency shares a positive correlation with gold. Australia is the world’s largest producer and exporter of gold, so its currency shares a positive correlation with gold. It is a fact to understand that the gold and the USD are inversely correlated.

EUR/USD and Crude Oil

USD exhibits an inverse relationship with crude oil, and the EURUSD represents one great way to trade this correlation. The price of crude oil is determined by forces of supply and demand. The demand for crude oil is determined by growth. Expanding industries require more crude oil and its derivatives. Supply is determined by the shares set by the producers. The USD is negatively affected by the higher oil prices as the United States is an overall importer of crude oil. Weakening in the oil prices implies the lesser amount being spent by the nation leading in the reduction of the trade deficit. This event is a USD positive event. The traders should opt for a CALL option on the USDCAD or a PUT option on the EURUSD if there is weakening the oil prices. Similarly, they should opt for a PUT option on the USDCAD or CALL option on the EURUSD if the oil prices strengthen.

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China and the AUD/USD

China dominates the production in the world with over 40% of its share. The country with such a substantial production imports raw materials from a country that has abundant raw materials and shares proximity with it. Australia satisfies these two criteria and is the biggest trade partner of China. This relates the increased economic growth of China with the growth of the export sector of Australia on a large scale. A negative impact on the Australian economy is also seen with the downfall of the economic growth of China. This establishes a positive correlation between China and the AUDUSD.

Sovereign Debt and Currencies

The formulation of the Euro is an example of the sovereign debt crises witnessed in Ireland, Greece, Portugal and Spain. It shows a strong correlation between credit ratings, sovereign debt, and the value of the involved currencies. Credit ratings are assigned by three principal credit rating companies that are Moody’s, Fitch and Standards, and Poor (S&P). These ratings signify the ability of the creditor nations to repay the loans taken as sovereign debt. If deficits rise to unsustainable levels, it creates the possibility of a credit rating to downgrade and have dampening effects on the currency of that country. Binary options traders should look at the emerging correlation between the value of a currency and the sovereign debt and trade accordingly.

Advantages and Disadvantages

Correlations can be a complex statistical topic, but hopefully this introduction gets you familiarized enough with the concepts to do a bit of homework on your own as well. Check correlations studies frequently to be aware of relationships between forex pairs which may be affecting your trading. Use the correlation data to control risk, find opportunities and filter trades.

An advantage of the correlation strategy is that the traders make predictions about the trends when we recognize the relationships. In the case of correlation between two assets, the prediction of one based on the other can be done easily. This strategy applies to almost all types of financial assets. It becomes a very efficient strategy when the traders use it with two accounts instead of one. Correlation generates important values that help to predict the price relationships between assets eventually assisting them in real trade. This strategy immensely helps the traders to identify associations between assets, determine the direction of this relationship, and execute trades based on the data represented.

The correlation strategy possesses the ability to identify new trading opportunities by determining the deviation of two closely associated trades. The correlation coefficient strategy can also be used when the trader considers another major indicator as a verification tool. Most of the correlations are fundamentally based. It allows the traders to get a long-term direction on the assets that they expect to trade based on these correlations, and look for viable trade entry spots to benefit from them.

The Bottom line

It can be seen that most of the correlations are fundamentally based. This allows traders to get a long-term direction on the asset that they intend to trade based on these correlations, and look for possible trade entry spots to profit from them. This strategy is not an independent one, so it cannot be used as an independent tool to analyse and trade. The traders have to use other methods and tools to support correlation even though it is a secondary strategy. Once the trader learns how to use it correctly, it is expected to produce a success rate of 90%. It is very difficult to comment on the producibility and effectiveness of any strategy as it solely depends upon the ability of a trader to exploit it positively. A sincere and a patient trader always will find correlation strategy as one of the most useful tools to maximise their profits in binary options trade.

How to trade binary options successfully

Almost every person who has recently learned about binary options (including even traders with considerable experience of trading in the Forex), refers to the possibility of earning on them skeptical. This stems from the hype, overly lopsided describing this source of income.

The reality is that for beginners who are not familiar with the technical and fundamental analysis, count on making a profit is not necessary. At least, the chance of success is low. But those who are sufficiently prepared – completely.

Important moments of working with binary options.

Trading Strategy.

Earnings on binary options involves the production of its own brand strategy. It is private, since the use of other people’s developments do not always converge with your character, preferred running time and other parameters, which may well affect the profit.
The strategy will have to include several types of transactions: fast, short, rare and long. If you are one of those people for whom the risk is unacceptable – high volatility and opened in a variety of short transaction is clearly not for you. A preferred embodiment of the transaction will be rare, calculated for a longer period of time (for longer periods easier to predict the movement of prices).
You also need to understand that a particular system is focused mainly on any particular asset. Those strategies that works well on the currency pairs may not show themselves to advantage when trading stocks. This encourages traders to analyze all the necessary trading tools offered by the broker, before forming his trading strategy.

Money management.

Many trading strategies are already contained installation relating to safety and the basics of financial management, but it is not always. Usually, they contain only signals triggered in a certain place and under certain market conditions. Therefore, if you want to make your binary options trading is relatively stable and secure, you need to designate several money management rules and strictly follow them.
Many famous traders of the opinion that the number of profitable trading strategy signals and positive / negative of the original of the expectation of much irrelevant. Much more important is the right approach to risk management. And it’s hard to disagree. Effective management of resources – this is the thing that will help in the long distance if you do not make money, then at least preserve capital. Here are some simple guidelines that should be followed:

• Not to be used in one transaction more than 5% of the total amount, more than 10% during the same time passing transactions. And it does not matter whether you work with day or turbo options.
• In fact, the profit of the trader is the difference between the number of winners and the amount of losing trades. Do not try to “get even” and increase the amount of the subsequent deal. This will run the risk of incurring even greater losses.

Practice.

Studying theory without proper securing knowledge into practice – a waste of time. You can read the book on trafficking in tens or even hundreds, and then drain your first deposit faster than the kettle on the stove to boil. The conclusion is simple: you have to train. The perfect solution for beginners in this situation will trade on a demo (Demo) account. It is a complete analogue of the real, but does not require real money investment.
During the practice of a trader familiar with its major flaws – greed, fear, hope and the like. It should be noted that a demo account does not give all this experience to the full, so you do not risk their savings. There will train more effectively in small amounts using a real account.
Trade in small amounts or trading on a demo account – a great opportunity to try out a new trading strategy, make sure it is working. Even if you come across on the Internet on how to assure you, 100% working version, burst on the stock exchange and to put on a grand scale is not recommended. First you need to test everything, to make their own conclusions.

The psychological moment.

The presence of the trader certain psychological skills is very important. Making a binary options and financial markets do best with people who know how to control their emotions, preferring cold calculation. Greed, fear, anxiety, stress – all of which can adversely affect the decision-making in the bidding process. For example, the greedy trader who is chasing profits and, no matter what preventive factors, risks rapidly losing capital.
On the other hand, there are a number of positive emotions, the presence of which the trader is to him an additional advantage. They are a joy, anxiety (as opposed to uncontrolled fear, it helps the trader to be more prudent not to risk wasting) and the ability to maintain composure in critical situations.

Choosing a broker.

Trading binary options is carried out through intermediaries – brokers binary options. It is important to choose a reliable company that will faithfully fulfill their obligations.
You should start with a check from the broker license of the regulatory body, as well as comparing the quotes offered by them with the real figures on the market (unscrupulous brokers are often manipulated quotations for the purpose of further profit). To do this, run the terminal addition of any other broker, comparison of data in real time.
In addition, the important role played by the protection of the site. Agree, if attackers get information for your account and withdraw money from the account, it will be extremely disappointing. The broker must provide additional resources to protect your account – reinforced authorization, confirmation of entry via SMS, and the like, and the site itself must support secure protocol HTTPS (simple HTTP does not guarantee an adequate level of security).

Conclusion. Is it possible to make money on the binary options?

As you can see, in the binary options trading is not as simple as it is described in promotional materials and websites who want to make money on affiliate programs webmaster. The reality is that the loss of one of the exchange more than the profit from other similar transaction. To preserve your capital, should be closed with a profit of six out of ten transactions. Earnings also require the trader to 70-80% winning trades.
Such high interest rates are not possible if you rely on mere luck. This “approach the player” on the long distance is not justified, the trader clearly lose their money. Earn on binary options really, but you need to fulfill all the conditions, which were discussed in the article – to develop a high-quality trade strategy, effective capital management strategy, develop the psychological stability, a lot of practice and cooperate only with reliable brokers.

Currency Correlation Explained

TABLE OF CONTENTS:

Currency correlation is one of the most common phenomena in the currency markets. It is also undoubtedly an area of interest among traders who want to take their trading to the next level. While complex, at the very core, currency correlation is probably one of the simplest of all to understand.

Correlation is a term which is used to depict when two currency pairs in the context of forex trading tend to exhibit the same characteristics. This could mean; two currency pairs could rally in unison or decline together. One of the most common ways to trade the forex markets is to look at a currency pair in isolation. While there is nothing wrong in this approach, applying the concept of correlation in the right way can magnify the profits (and losses). The term correlation is a statistical term and is measured within the range of +1 and -1. A currency pair with +1 correlation (or positive correlation) often moves in tandem, while a currency pair with -1 correlation (or negative correlation) tends to move in the opposite direction. However, it is unlikely to find such a tightly correlated currency pair. The usually accepted values for correlation are from +0.7 (or 70% correlation) and -0.7 (or -70% correlation).

Why do currency correlations occur?

Currency correlations occur all the time due to the basic fact that currencies are traded in pairs in the spot forex market. For example, when you trade EURUSD, you would either buy the Euro and sell the US Dollar or vice versa. At regular intervals, some currency pairs tend to correlate based on the larger market dynamics such as supply and demand. Taking a very simple example of a central bank hiking interest rates in a surprise move (and one where the expectations were for no rate hikes), that particular currency would often rally across its peers. Therefore, if the RBA for example had hike rates, then all AUD crosses would be rallying where the Australian Dollar is the bid currency (and all AUD crosses would decline where the Australian Dollar is the quote currency).

Besides these short term correlations, currencies tend to exhibit positive or negative correlations which can be spread across inter markets (ex: Forex and Commodities) or within the markets (ex: USDCHF and EURUSD).

How to trade currency correlations

For a trader who understands currency correlations, the most simplest and important of all points to bear in mind is not to have exposure in the same direction on two currency pairs that are negatively correlated.

For example, EURUSD and USDCHF are two of the most common negatively correlated currency pairs. This means, if you are long on EURUSD, you would not go long on USDCHF or vice versa. Depending on the time frame you are trading, currency correlations can be an important aspect. The chart below shows EURAUD and AUDCAD which have -8 (or -80%) correlation.

EURAUD & AUDCAD: Negative Correlation

The above chart shows how prices in EURAUD and AUDCAD have been moving in opposite directions based on the correlation. Therefore, by learning the simple fact that these two currencies are negatively correlated, a trader can be more careful by going long on both the currency pairs.

1 month currency correlation chart

The above chart is used by setting the filter to +75% (positive correlation) and -75% (negative correlation). The chart can be useful in showing traders which pairs move similarly and which pairs are moving in opposite direction. As an example, if you were to go long on AUDCAD, then EURAUD and USDJPY short positions would offer greater potential to maximize your profits or vice versa. Likewise, if you were long on AUDCHF, then you could also look at long positions in AUDZND as well.

Traders should however note that currency correlation doesn’t mean prices behave in similar or opposite directions to the pips. Some currency pairs might move more in tandem while other currency pairs might lag. It is therefore essential that a trader apply their trading strategies to the correlated pairs and take a trading decision accordingly. Also, correlations tend to change over a period of time which is another factor to bear in mind. These correlation changes can happen due to many reasons such as market events, interest rate decisions, and geo-political shifts among other things. Therefore, correlations are dynamic and a trader needs to keep this in mind.

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