One of the most simple yet effective of all strategies a trader of binary options can master is the ‘Knock-On Effect’. Often referred to as the Market Pull Strategy and a firm favourite amongst traders, the ‘Knock-On Effect’ is based around the movement of an option that will produce the knock-on effect on to another option.
There are many inter-relationships that exist between assets and it would be a difficult task for an inexperienced trader to know and understand all the different inter-relationships. However, once some inter-relationships have been understood, the forecasting of price movements becomes a much simpler and more profitable task.
Examples of the Market Pull Strategy
Probably the most encompassing of all the assets to apply the market pull strategy to, is the US Dollar (USD). The US Dollar is the most traded currency and has many different inter-relationships with other currencies and commodities in particular. Nearly all tradable commodities such as Gold, Silver, Oil, Soya and Copper are bought and sold in the greenback. This means that when the USD goes down in value the cost of buying the assets is less than before, making them more attractive to investors and pushing the value of the commodities higher. This also of course works in reverse – When the USD strengthens and increases in price; commodities like Gold become more expensive to buy, demand weakens and the price of Gold falls.
Certain currencies have strong inter-relationships with commodities, which once understood, makes price movement easier to predict. Canada is a large oil producer, one of the biggest oil exporters in the world. Its currency – the Canadian Dollar or Loonie as it is sometimes referred to, is an oil sensitive currency; when the price of oil goes up, more often than not, the price of the Canadian dollar goes up too and vice versa; when the value of crude oil declines, the CAD invariably weakens in value.
At the other end of the spectrum, Japan is a heavy consumer and importer of oil, depending on about 50% of its total energy requirements on oil. This means that when oil price goes up, the cost of manufacturing goes up which in turn weakens the Japanese Yen.
Similarly, the Australian Dollar (AUD) and New Zealand Dollar (NZD) are both commodity linked currencies with both countries being countries with vast reserves of minerals and metals. Australia ranks third in the world of largest Gold producer, which means when Golds’ value goes up, the price of the Aussie or Australian Dollar (AUD) is likely to increase. The last ten years has seen a positive correlation of about 80 – 90% between the Aussie and the price of Gold making it one of the most reliable and consistent performers for traders using the market pull strategy.
Following The News
Market Pull strategies can be effectively implemented by traders following the news. Recently, there have been tensions between the Iran and the West. Iran happens to be the worlds 4th largest producer of oil and happens to control the Strait of Hormuz which is used to transport 33% of all the worlds’ oil. When tensions mount, the supply line is threatened and the price of oil goes up. Another example of the market pull strategy can be used just by following the news is when there was major flooding in Thailand. Japan, a major exporter of consumer goods suffered as a result of the flooding as a great deal of Japanese exports travel through Thailand. As a result of an interrupted export route, exports and ultimately the Japanese Yen suffered.
Overall, the Knock-on Effect/Market Pull Strategy is one of the most important and reliable strategies that a binary options trader can implement. The inter-relationships come in varying degrees of subtlety and difficulty but spending the time to research the assets and keeping abreast of news events can produce sizeable rewards, which is the reason why it remains one of the first strategies a binary trader should learn.