Correlation strategy is arguably one of the most efficient approaches for identifying entry points to make trades. In the binary options market, particular assets are correlated (or have a relationship) with other assets. Correlation implies that you can predict the behaviour or movement of one asset based on the performance of another correlated asset.
Correlation points out similarities in the performances and the general movements of the two datasets. The stronger the association between the two instruments, the greater the likelihood that a method will perform accurately in evaluating and forecasting the market trends. The effectiveness of this strategy entirely depends on the adeptness of the trader to identify the trends, establish the relationship, and operate successfully.
Understanding the strategy
This strategy is a combination of other strategies making it a secondary or complementary approach to trading. Correlation can be positive or negative. A positive one implies that the correlated assets move in the same direction, while a negative one indicates that the assets move in the opposite direction.
Often, prices of correlated assets go up and plummet simultaneously and unidirectional. For instance, the Euro and Swiss Franc tends to move in the same directions. Markets cannot trend in similar direction all through regardless of whether they are raw materials, indexes or currencies. To make the most out of the asset with most movement, minimize risk and incorporate gains, a trader ought to divide his activities into two sections for this strategy.
As part of mastering the art of correlative strategy, a trader must have an understanding of some assets that are closely related. A prime example of a correlation between currency, an economy, and a commodity is Australian/US dollar and Copper. It is a positive relationship, and it gives traders a choice between copper binaries when AUD/USD does not appeal to them. Most people consider gold as a safe asset during an economic crisis, elongated depletion of capital or capital preservation mode for traders. Therefore, people often trade gold as a correlated asset during inflation to hedge against the inflation.
Relationship with currency
You can go further and relate this scenario with currency. For instance, Australia is the largest producer and exporter of gold, so the AUD has a positive correlation with gold. On the hand, USD has an inverse correlation with gold. Another good example would be the relationship between AUD and Chinese currency.
China dominates about 40% of world’s production and imports most of its raw materials from the closest neighbour Australia. So Australia is china’s biggest trade partner, and when China is experiencing growth, the Australian export sector stimulates it. A fall in Australia export sector slows down growth in the Chinese economy. It means that there is a positive correlation between AUD and Chinese economic growth or currency.
Advantage of the strategy
One advantage of correlation strategy is that it allows traders to predict trends when they have an understanding of the relationships. When there is a correlation between two assets, it simplifies prediction of one asset based on another, and this is applicable for almost all financial assets.
It produces significant values that enable prediction of price relationships between assets ultimately supporting them in real trade. This approach greatly helps traders to recognize relations between assets, establish the trend of this relationship, and carry out trades founded on the dataset represented. However, a trader can always seek the help of UltraTrade to learn how to use the strategy correctly to maximize profits.
Further, the strategy has the capability to make out novel trading opportunities by finding out the variation of two strongly connected businesses. Besides, the trader can use the approach as a verification tool especially when the trader is knowledgeable about correlation coefficients. Since most correlations are fundamentally based, the trader can get a long-term direction on the properties that they expect to trade then get suitable business entry spots that will benefit them.