Correlations & Binary Options: Good Strategies? - correlations

Correlations in short-term trading. It depends on suitable aids. Test & experience for fundamental analysis. Find out how to do it.

There are many strategies based on technical analysis. For short-term trading, technical tools are the be-all and end-all. Since private traders have little fundamental information, that is, no inside information, the technical analysis proves to be essential. But professional traders also use the technical analysis, for example for good entry points.

Nevertheless, one often overlooks the fact that there are certain fundamental characteristics within the capital markets that are freely accessible and predictable. This includes, for example, correlations between different markets or underlyings. Since capital markets are nothing more than movements of capital, it is not surprising that capital shifts on one side lead to movements on the other.

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What are correlations?

Correlations are close relationships between the prices of underlyings or asset classes. A distinction can be made between negative and positive correlations. For example, a positive correlation between the DAX and the US stock indices cannot be overlooked.

The chart clearly shows that the S&P 500 index and the DAX run parallel to one another. Another example of a positive correlation would be the trend in the prices of North American (WTI) and European (Brent) oil prices. An example of a negative correlation exists between many currency pairs, e.g. EUR / USD and USD / CHF.

Correlations arise due to fundamental properties, which can, however, be made visible on a technical basis. In the case of the stock indices, the capital shifts within the stock markets are very similar. If energy stocks are sold in the US markets, they will also be weaker in the European markets. At the same time, for example, shifts to other markets such as bonds are so strong that global equity markets are affected.

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Correlations & Binary Options: Good Strategies? - correlations

How to use correlations?

Correlations are therefore fundamental properties that are common to the values. But sometimes it happens that the correlation between the two values ​​shifts. This could be the case with stock indices, for example, when relevant economic data is published.

Correlations can either be determined using statistical calculations, which are published by many financial information portals as a correlation matrix, or you can simply proceed and observe using a benchmark analysis visually on the chart. In practice, correlations can be seen in this way, at least with strongly correlating values.

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S&P 500

In order to stick to the initial example of the stock indices, it can be seen that in most cases the DAX index ran ahead of the S&P 500 index in 2014. At least the correction in the market always took place first. In this case, it could have been assumed that the US leading index would also collapse a short time later, and so it was.

To act this correlation, one would have had to trade somewhat longer-term options. Furthermore, it has to be noted that the lead time does not always start from the DAX, but usually even from the United States.

Correlations & Binary Options: Good Strategies? - correlations

Example EUR / USD vs. USD / CHF and USD / JPY

Another way to use correlations would be to trade binary options on a short-term basis. To do this, you have to trade very strongly correlating values, such as the currency pairs EUR / USD and USD / CHF.

As presented above, there is a negative correlation between the two currency pairs. A strong move in one value has a subsequent move in the other. It is now important to determine by observation when there are strong movements in the EUR / USD currency pair that have not yet occurred in the USD / CHF currency pair.

From experience it can be said that such moments are particularly evident in the correlation of the two Currency pairs are very rare. But then only if something happens in one of the countries that weakens the correlation for a short time. In this case, one speculates that the correlation will adjust again.

Act correlations - briefly explained binary options

Anyone interested in trading correlations now has a first insight into this strategy receive. Before applying a strategy, however, traders should take a close look at binary options trading in order to really understand the highly speculative financial instrument and to learn about ways to minimize risk. What are binary options and how are they traded? The following slideshow summarizes the most important facts briefly and shows how you can get to the first trade in just five steps.

Trading correlations is very similar to trading pair options, except that you use indirect value properties indirectly.

Good luck!

Correlations & Binary Options: Good Strategies? - correlations

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