Binary Options correlation coefficient strategy

Correlation strategies in binary options trading involve using the relationship between the movements of two assets to make trades. This article explores how the correlation between the movements of two assets can be a powerful tool for traders to make more informed and successful trades. We will take you through the strategy step by step.

Binary Options correlation coefficient strategy

Good to know:

  • Correlation strategies in binary options trading are the use of the relationship between the movements of two assets in order to make trades.
  • A correlation coefficient ranges from +1 (perfect positive correlation) to -1 (perfect negative correlation).
  • Significant correlations are typically above 0.7 or below -0.7.
  • Correlation is used to identify trading opportunities when the performance of correlated assets begins to diverge, often complemented by other technical indicators such as Bollinger Bands.

What is the Binary Options correlation coefficient strategy?

correlation coefficient strategy

The idea behind the correlation coefficient strategy is used when there is a major price movement in one asset – the coefficient indicates that you can expect a similar movement in another asset in the near future.

By using this strategy, you can give more informed predictions and thus place your binary options trades. Besides, remember that correlation is not consistent; it can vary depending on the changing economic situations, so be prudent and follow the trend strictly.

This is not only a flow tracer strategy but it identifies the market rhythm and uses it to its favour.

correlation coefficient in binary options trading

Moreover, there are a number of strategies with the correlation coefficient that can give you chances to fix some profits – irrespective of in which direction the market is moving currently, i.e. sideways, downwards, or upwards.

  • Such a correlation measure is assessed using a scale from plus one to minus one. A reading of +1 refers to perfect positive correlation, which means two assets moving in the absolute unison – rising exactly the same number, i.e. if the price of one is going up so will the other be.
  • On the other hand, a value of -1 records a perfect negative correlation that two securities are moving wholly opposite to each other from one another.

The moves above indicate towards less oriented directional price movements of the two assets under study as the correlation moves back towards its zero level.

  • Experts in this subject advise that correlation readings are only truly significant when they record figures 0.7 or above, or -0.7 or below.

All the numbers that lay outside of these ranges are considered less meaningful because they are not strong enough upon which to base qualitative trading decisions.

Correlations are also, at times, expressed in percentage. When such a convention is adopted this parameter is then known as the coefficient of determination.

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Example of a correlation coefficient strategy

Trading View Chart - Google/Apple

In markets with direct competitors, such as Google/Apple or Exxon/Shell, their stock performances often correlate. A deeper understanding of this can be gained through the following example: Amazon and Google, both prominent in the mobile device market.

Suppose you’re observing the trading charts of these companies when news breaks of an Amazon flagship product upgrade, causing its share price to soar. This event is likely to negatively impact Google. Monitoring Google’s stock, you notice no immediate decline. However, anticipating a subsequent drop, you initiate a PUT binary option on Google, leveraging the correlation between the two companies.

Correlation coefficient strategies are a form of market-neutral strategy, allowing traders to profit from relative price movements without depending on the overall market direction. This strategy involves exploiting divergences when the trading performances of selected assets start to deviate. To capitalize on the asset you predict will outperform, you’d open a CALL binary option. Conversely, for the asset expected to underperform, a PUT binary option would be the strategy of choice

Introducing pair options

Binary Options correlation coefficient strategy

A completely new brand of binary options has recently been introduced into the market, called pair options, that has been specifically designed to exploit the benefits of correlation. In particular, pair options enable you to speculate on the relative performance of two highly correlated assets by activating just one trade and not two. Another important feature of pair options is that they are ideal vehicles upon which to construct strategies that have the prime intent of utilizing the benefits of correlation.

You will discover that correlation is a very useful parameter to monitor and track because it can generate values that can be used to forecast the price relationships between assets that are very effective in real trading situations. For example, if you detect that the correlated relationship between Coke and Pepsi is beginning to suddenly diverge, then this would be a great time to execute a pair option based on Coke/Pepsi. If you favor that Coke will outperform Pepsi then you should open a CALL binary option. Alternatively, implement a PUT binary option if you support Pepsi.

Probably the main benefit of correlation is its ability to identify new trading opportunities by detecting when the trading performances of two closely matched assets are starting to deviate. If you decide to utilize a correlation coefficient strategy, consider incorporating another major technical indicator as a verification source. Many traders use the Bollinger Bands for this purpose.

Conclusion: Correlation coefficient strategy helps protect against market volatility

Binary options trading correlation coefficient strategy offers a sophisticated approach to understanding the market dynamics. Traders focus on the relationship that exists between two correlated assets and make predictions based on the movement of one asset regarding the other.

This strategy is effective when applied hand-in-hand with pair options, where the trader can predict on the performance of two assets relative to each other within a single trade. Further, more technical indicators such as Bollinger Bands can be added to increase the effectiveness of this strategy.

Eventually, comprehension and application of correlation in trading may provide the trader novice with new opportunities and also protection for the volatility that haunts the market.

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Frequently asked questions about the correlation coefficient strategy:

What is the correlation coefficient strategy in binary options trading?

Correlation coefficient strategy is the use of a relationship between two or more correlated assets, to forecast and trade, using the view that these assets typically move either in synchrony or on an opposite basis.

How is the correlation coefficient measured when using the strategy and what is its meaning?

The coefficient of correlation is measured on a scale from +1 to -1 which +1 stands for perfect positive correlation and -1 stands for perfect negative correlation. Most of the significant correlations are above 0.7 or below -0.7, so they provide a strong basis to take trading decisions.

What are pair options and what does a strategy of correlation coefficient have to do with them?

The pair options present a form of binary options within which speculation on the relative performance between two assets is conducted whose prices enjoy an existing mutual correlation. They are especially useful for taking advantage of correlation, as they comprise speculating the behavior of an asset compared to another.

Why might a trader use other technical indicators alongside the correlation coefficient strategy?

Other technical indicators such as Bollinger Bands are used in conjunction to the correlation coefficient strategy for confirmation and strengthening of prediction accuracy respectively hence yielding a more will-rounded asset trend and market performance analysis.

About the author

Percival Knight
Percival Knight is an experienced Binary Options trader for more than ten years. Mainly, he trades 60-second trades at a very high hit rate. My favorite strategies is by using candlesticks and fake-breakouts

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