Binary Options Correlation Trading

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Binary Options Correlation Trading

Trading binary options and CFDs should go hand in hand with trading any other financial instrument as it implies the same thing: to find out the direction the market is going and then take a decision based on that analysis.

In the case of binary options, besides telling which way the market is about to move, one should also look at the expiration date involved as it is critical for the profitability of your option. CFDs make it easier since they don’t have expiration time.

Sometimes it is possible to trade forex using a simple and straight forward correlation strategy and for that a couple of things are required.

  1. First of all, correlations can be direct or inversed and one should trade call and put options/seel or buy contracts on two currency pairs, for example, that are inversed correlated. The classical example here goes with the EURUSD and USDCHF inversed correlation as, because the EURCHF peg at the 1.20 level it implies the two majors will move in opposite directions almost tick by tick as closer to the 1.20 level the EURCHF gets. However, this is not valid anymore as the SNB (Swiss National Bank) dropped the peg and this made the EURCHF floating currency pair.
  2. Secondly, look to trade correlations between the risk on/risk off environment, in the sense that rarely in a risk on environment the USDCAD is moving higher as it is bearish in these situations and PUT options/SELL contracts should be traded.

Risk OFF/Risk ON Environments on Forex Market

A risk off environment implies EURUSD, GBPUSD, AUDUSD and NZDUSD moving in the same direction, lower, while USDCAD, USDJPY and USDCHF higher, so PUT options/SELL contracts for the first category and CALL options/BUY contracts for the second one are recommended.

And thirdly, the USDJPY and US equities correlation should be traded normally as a direct correlation and if the US equities are bullish, or in a bullish trend, then it doesn’t make any sense to trade PUT options/SELL contracts on the USDJPY.

Trading in a correlated manner implies also avoiding overtrading as this is one of the worst enemies in trading. For example, let’s assume one is trading a CALL options/BUY contracts on the EURUSD at the start of the trading week with end of week expiration date for binary options.

If market goes against your trade during the trading week and (until the expiration date) and the trader still wants to take a trade then it is advisable to choose a currency pair that is not directly correlated with the currency pair initially traded. For example, if the trader buys a CALL option/BUY contract on the EURUSD and market goes against the trade then it is not wise to trade a GBPUSD CALL option/BUY CFD in the same direction as it represents a dual trade and basically forms overtrading.

On the other hand, if the option moves in your favor, adding on breaks it wise or even adding on dips/spikes with different expiration dates.

Trading Correlated Forex Markets

Correlations can be traded also from a cross and its two majors point of view. Let’s take the EURUSD, USDJPY and EURJPY example. The first two currency pairs are majors and the last one is a cross. The cross is moving based on the differences the two majors are making when traveling. If the EURUSD pair is moving to the upside one percent and USDJPY to the downside as well, then the cross, the EURJPY is staying flat, so avoiding high/low options on the cross is key.

Moreover, when there is a trading setup on the cross, in our example on the EURJPY cross, then the thing to do is to compare the cross chart with the two majors chart and look for correlated price action. In our example, lately, it is obviously the EURJPY is moving closely to the EURUSD chart and therefore on a bearish setup on the eurjpy it is advisable to trade either range options, like one touch or boundary for USDJPY pair or put options for eurusd as the EURJPY and EURUSD charts recently are the same.

USDJPY and US Equities Correlation

Another correlation that is in place and works like a charm for so many years now is the one between the USDJPY and equity indices, like SP500 or Dow Jones in the United States. The correlation is a direct one and if, for example, usdjpy is moving to the upside and the equity markets are not confirming the move, then one is lying or it is lagging for the moment. If, on the other hand, they are moving hand in hand then trying to see which one is moving slower and insisting in trading options on that one should be a wise decision.

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The two video recordings that are in this article are showing you what to look for when trading with correlations as well as listing the correlated markets and possibilities a binary options trader should take into account regardless the market is trading: FX, stocks, equities, or indices.

Trading Binary Options to News Releases and Events

News events are a major factor in determining market direction in any financial market, and binary options trading is no exception.

To be able to trade the news effectively in binary options, you need to know how to trade and what to trade. You also need to identify which platform you will be using to trade, as trading the news on American-style binary options brokers is very different from doing same on European-style binary options brokers.

Trading the News on American-style Binary Options

If you are going to be trading the news on NADEX or Cantor Exchange, then you need to understand what trading the news is on these platforms. You can trade certain news items directly on these exchanges. The US Jobless Claims data and the Non-Farm Payroll report are the two major news events you can trade on NADEX or Cantor Exchange directly. Unlike most binary options assets, the news releases do not track any underlying markets. You just need to understand what the news is all about, what it traded and how to set the trades accordingly.

About the News Events

There are many events and releases that impact the price of certain related assets. Fortunately the biggest economic news and releases are published in an open forum and it is known in advance when and what will be published. Please visit the economic calendar for binary options to see upcoming news and economic releases.

The Jobless Claims measures the change in the number of people in the U.S. who are applying for unemployment insurance (jobless benefits) for the first time. The data is published every week at. You will be presented with a consensus number, a previous number and when the data is released, an actual number. You need to know the following:

  • The difference between the actual number and consensus number. Is the present figure worse or better than the previous week’s numbers?
  • Is the difference between the actual and consensus numbers greater or less than the difference between the consensus and previous numbers? This is known as the deviation and it will determine the extent to which the USD will react to this news release.
  • Keep in mind the present employment situation in the country as well, as it will determine how the markets react to the figures.

The NFP measures the change in the number of new jobs created in various sectors of the US economy except the agricultural sector. You will also be presented with a consensus number, previous number and when the news is released, the actual number. This news release creates volatility on the USD/JPY. The same questions you must answer as written above for the Jobless Claims report, must be answered by the trader before trading the NFP. It is released on the 1 st Friday of the new month by 8.30am EST.

The following resources can be used to predict what the news release numbers will look like:

Trade Strategy for News Releases

Certain trade strategies must be used when trading the news on American-style binary options. These are as follows:

  • The Out of the Money (OTM) strategy is used to trade situations of surprise. So if the recent releases for the Jobless Claims and NFP show the actual numbers beating consensus estimates, an OTM strategy should be set on the Monday before news release, using the consensus number as strike price.
  • If the trend shows that actual numbers are recently falling below consensus, an in-the-money (ITM) strategy is used, and this trade is setup on the day of the news release.

You may also trade the currency pairs associated with these news items. The USD/JPY is the preferred currency pair to trade the NFP, while the EUR/USD and USD/JPY are used to trade the Jobless Claims report. You can trade these currencies on the basis of BUY if the news releases beat estimates (better than expected), or SELL if the news releases disappoint.

Trading the News on European-style Binary Options

If you are trading the news on European-style options, used by platforms such as 24option, you have to be extremely careful. This is because if the number of orders on one side of the trade far outweighs those on the other side of the trade equation, there is every likelihood that trade on that asset will be frozen and it will be impossible to trade the news.

Therefore, the focus should be two-fold:

  • Avoid trading on an asset directly and rather trade correlated assets
  • Trade after the news has been released to profit from the longer term effect.

Here is how to deploy these trade strategies:

Correlated Asset Trading in Response to News

To illustrate this, we will cite the example of the Australian Dollar and Copper. Australia is the home of raw materials production and most of this goes to China where 40% of the world’s manufacturing takes place. So there is an integral link between Chinese manufacturing data (such as the PMI), Chinese GDP figures, the value of the Aussie Dollar, and Copper prices. A boost in Chinese manufacturing or Chinese growth will trigger a demand for commodities such as copper which are mined in large quantities in Australia, and will also boost the value of the Aussie Dollar.

So one news item I would follow would be the Chinese manufacturing data, or the Chinese GDP data. But rather than try to trade the pairing of the USD and the Chinese Yuan (wherever it may be found), it would be better to trade copper. Copper and the AUD/USD have a direct relationship to the Chinese data on manufacturing or growth, so they track it wherever it goes. By trading correlated assets, you avoid a scenario where every trader can almost guess the direction of an asset, push the order flows out of balance and force the brokers to freeze trades in that asset.

There are other correlated assets that could be traded. Try to look for the connections. For instance, what is the relationship between the Japanese Yen, the Nikkei 225 average and the Dow?

The snapshot above can give you a clue as to what the relationship is. You only need to read news about the recent surge of the USD against the Yen, and the gains made by the Nikkei 225 in that time frame to understand the relationship.

If you would like to know more about trading the Forex to news releases as fundamental analysis please visit the Economic Calendar for binary options.

Binary Options Currency Correlation

The correlation is a very important concept or strategy in the Binary Options market. It is an open secret that traders always price various currencies in pairs as no single pair has the ability or power to trade independently from others and yet succeed. This is why it is very important and most often, a matter of survival to understand what actually the correlation is.

There are many ways through which correlation can influence the fate of any trader. For instance, the currency pairs “A” and “B” are moving in the same direction but you have only been closely following the movement of pair A while totally ignoring the other pair. Let’s find out more about the binary options correlation strategy below on a practical example.

You expect pair A to go up and consequently you buy it. However, you suddenly realize that you also have to deal with pair B that might go down according to your technical and fundamental analyses and as a result, you sell pair B short. Now what will happen that you might earn profit on pair A but you can expect loss from pair B as both the currency pairs are moving in the same direction. Similarly, you can also experience the same thing if you go long and short at the same time to pairs that seem to move in opposite direction.

In fact, you can take maximum advantage of binary options currency correlations and improve your portfolio profitability. But do so only if you manage to clearly understand what they actually mean and how they fluctuate or change with the passage of time. Some of the most important types of correlations are as following.

The Binary correlation coefficient

You need to learn what the correlation coefficients before understanding its type. In Binary trading, these coefficients range between -1 to +1. The currency pairs will always move in the same direction if the correlation is +1 whereas pairs will always move in the opposite direction in case there is total negative. The correlation between the currency pairs is totally random if the figure is zero.

Positive Binary Options Correlation

Currency figures generally move in the same direction if the figure is positive but less than +1 but it is not mandatory. In fact, there are greater chances of pairs to move in the same direction if the figure is close to +1.

Negative Correlation in Binary Options

A currency pair will usually move in the opposite direction if the correlation is negative but greater than -1 but it is not a hard and fast rule. They move in the opposite direction most of the time if the value is closer to the critical figure of -1.

In general options correlations are dynamic and can change at any moment. You can actually assess your chances of placing a successful trade by comparing the correlation of past few days with the long term correlation value. For instance, the two currency pairs A and B have been moving in the same direction during last year while going up and down with the same speed. However, you have observed in last month or so that the currency pairs are moving in the same direction but with different speed. Therefore, you can simply buy a currency pair that has been going up slowly because both the pairs will ultimately catch on speed and will move with similar speed. On the other hand, you can short see or ignore the other currency pair to make your trade successful.

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