Although binary options are one of the simplest forms of financial trading, they cannot be traded successfully without you understanding the characteristics of their underlying assets or the impact of economic factors on their price. Therefore, it is essential that you and novice traders fully understand them before investing too much of your hard earned capital into your broker trading account.
Binary options give the novice trader a way to trade in multiple global markets such as the foreign exchange, stock, stock indices and commodities markets. Within these markets are hundreds of different types of assets. For example you can trade all the major currency pairs. This means that you have to know the characteristics and personality of the various currency pairs as well as the correlations between currency pairs and other assets.
Understanding the Correlations
If you know the correlations whether negative or positive between currencies and commodities, or currencies and currencies, or currencies and stock markets, or even stock markets and stock markets, your knowledge of binary options will increase and you will have far more success in your trading.
For example, if you knew that the EUR/USD and GBP/USD currency pairs had a strong positive correlation and you were fairly certain that the GBP/USD price would rise, as well as buying a GBP/USD call you could also buy a EUR/USD call. On the other hand EUR/USD and USD/CHF have a strong negative correlation, so if you were confident that for example the price of the EUR/USD currency pair was going down, you may wish to place a trade on the price of the USD/CHF currency pair rising. So you could buy a EUR/USD “Put” option, and a USD/CHF “Call” option.
There are also currency correlations with commodities. For example, the price of gold is positively correlated with the AUD/USD currency pair. When the gold price rises, the price of the AUD/USD currency pair generally rises, as well. Meanwhile, the USD/CAD is negatively correlated with the price of oil. If the oil price increases so does the Canadian dollar. So if you were confident that oil prices were rising and you intended to buy an oil binary option “Call,” you could also buy a USD/CAD “Put,” as there is a very strong chance that the dollar would fall against the Canadian dollar.
Stock Indices Correlation
There are also correlations between stock indices such as the Dow Jones and the Nikkei which are positively correlated. So if you were confident that the Dow Jones index would rise you would buy a Dow Jones “Call,” and, as the Nikkei index was positively correlated with the Dow Jones, you could also buy a Nikkei “Call” option. In addition, the Nikkei index is positively correlated with the USD/YEN currency pair so if you were confident that the Nikkei index was falling, you could buy a Nikkei “Put” option and buy a USD/YEN “Put” as well.
As you can see, the more you know about the underlying assets of binary options, their characteristics and their correlations, the better your chances of making very good profits.