Understanding the Implementation of Knock-on Effect Strategy Part 1

Understanding the Implementation of Knock-on Effect Strategy Part 1

Submitted by adil on Mon, 08/11/2014 - 20:00

Get Ready for a Very Unique Strategy!

In this article, a very unique strategy will be discussed that significantly increases the probability of making more profits in binary option trading. The strategy is known as the knock-on effect strategy, commonly called the market pull strategy by binary option traders.

The underlying concept:

This strategy is based upon the fact that the price variations in one option causes price variations in another option. It is therefore, very important to understand how different assets are interrelated, and which asset combination is the best to use with this strategy.

Understanding the strategy through examples:

To verify the effectiveness of this strategy, let us review some combinations where price action of one asset can help to predict the price movement of another asset.

• Gold vs US Dollar:

Analyzing the historical facts, one can easily infer that the values of gold and USD are inversely related to each other. When the value of gold increases, the value of USD decreases, and when USD goes up, gold’s value takes a slump. This correlation has remained true consistently for a long time. There is no doubt some situations occur when the inverse correlation isn’t followed, but such occurrences are very rare and can be labelled as outlier events.

The above chart depicts the gold and USD correlation that can be effectively used by currency traders to make trades on USD/CHF or USD/AUD. Both Australian Dollar and Swiss Franc are directly related to gold value because these currencies are backed through gold reserves.

Generally, the value of gold is an indicator of how much the market is unstable, and the value of USD portrays how healthy the world economy currently is.

• Oil vs CAD/USD:

The modern industrial structure is designed around the power sources that run on oil. Oil is essential to sustain productivity and strengthen the economy. The prices of oil can be easily correlated with the CAD/USD combination because Canada has one of the largest oil reserves and US fulfills most of its needs by importing oil from its neighbor.

Therefore it can be easily deduced that when oil prices rise, Canadian Dollar gains value against USD, and when oil prices go down, USD gains the upper hand.

This positive correlation of oil and CAD means that oil and CAD/USD are directly related to each other which is also confirmed by the chart below.

• Copper and AUD/USD:

Copper is essential for any country that is experiencing growth in modern technology. China is the one of the biggest importer of copper due to thriving industries, and Australia is one of the biggest exporter. When Chinese demand for copper increases, the value of AUD strengthens as compared to USD. Therefore, copper and AUD/USD are directly related to each other. The economic growth of China also reflects in Shanghai index, which gives the binary option traders a unique commodity - combination of currency and index to trade on.

In the next part of this article, further useful insights will be provided on the knock-on effect strategy.