Correlations Involving Binary Markets-Options Market

Let’s review some important correlations involving some of the binary markets. These include, but are not limited to: the Aussie dollar and copper,gold and the U.S. dollar, as well as a set of fears that act as market forces.Of the more than 20 binary options underlying markets to trade, the AUD/USD, and copper contracts offer the most direct play on China’s growth or fears of China’s slowdown.

Evidence of the relationship between China’s economic prospects and Australia can be seen in the high correlations that occur between the AUD/USD spot market and the Shanghai Index (Figure 4.5). There are times when the correlation approaches 90 percent.There are also periods of a lack of co-movement and even negative correlations.This variation in correlations needs to be kept in mind by the trader.

It’s a good idea for the trader to keep track of the Shanghai Index when contemplating a trade on either the AUD/USD as well as copper. The co-movement between China and Australia can be clearly seen in Figure 4.6, which tracks the AUD/USD and the Shanghai Index.Both the copper and the AUD/USD binaries can be treated as essentially trading the same event. Copper can be used as a directional indicator for strength or weakness in the Aussie and vice versa. We can see the close relationship between copper and the Aussie.

There are times when the correlation between the AUD/USD and copper approaches over 90 percent, and there are times the relationship hits a disconnect and has 0 correlation. The trader should not take for granted a consistent high correlation between the AUD/USD and copper markets.Gold:Gold is often treated as a risk-aversion basket, attracting capital in times of crises. It’s important, though counter-intuitive, for the trader to realize that gold can sell off if the crisis is so big that it requires the selling of gold to raise capital.

Traders betting that gold will always rise in response to crises,therefore, have to be careful. From a more macroeconomic and fundamental force perspective, gold acts as a hedge against infl ation. This can be seen in when comparing spot gold against the U.S. 10-year TIPS.Gold attracts capital when the market fears infl ation, or a major fi nancial or global crisis. Interest rate increases, and the expectation of interest rate increases, by central banks is a common precursor to an expectation of infl ation.

However, there are times when interest rate increases can negatively affect gold prices. This is particularly applicable to India, which has a leading gold consumer market. In India, if interest rate increases are a surprise, the effect has been to decrease the effectiveness of gold as a hedge against infl ation.This may appear as unusual. However, if interest rates are increased too much, they can be perceived as a drag on the economy, thereby reducing consumer demand and purchasing power. As a result, gold demand is expected to go down.

For the binary option trader, the most important aspect in looking at the gold market is to assess the price pattern. Is it going parabolic? Is it in a sideways range? Is it at key resistance or support levels? Also, since gold is a driver of the Aussie, reaching very high correlation levels of over 90 percent,it’s important to monitor this correlation and make sure that when making a trading decision, what the actual correlation levels are .

The binary option trader can trade gold as an underlying market, and, or look to the AUD/USD as the underlying market related to gold. When trading the AUD/USD on a premise of a gold move, it’s very important to evaluate whether they are really tracking together. There are times they diverge from each other and it’s not an automatic co-movement .U.S. Dollar:After reviewing gold and its correlations, taking a closer look at the U.S. dollar will add to the knowledge base of the binary option trader.