Perhaps one of the most critical of all the basic strategies a binary options trader can learn is the ‘Knock-On Effect’. In theory it is also sometimes called as ‘Market Pull Strategy’. The basic concept behind the strategy is that a movement of an option will have an effect on another option. This effect is knock-on effect.
It’s a very useful tactic that experienced traders apply to any asset. This involves deep understanding of financial market inter-relations. By following these financial market interrelations, a trader can invest in either a ‘Call’ or ‘Put’ option based on dramatic changes one market experiences. This can lead to changes in other markets as well. Hence, knock on effect strategy can work for a trader when he develops an understanding of different relationships of various financial assets. The advantage of knock-on effect is when it does work it can be highly effective. Predicting price movements become much easier and more profitable. A trader needs to learn interrelationships and then apply them correctly in the financial market.
Knock-on effect strategy examples in real life
For example, we know that for different countries, currencies rely heavily on some assets as well as on country’s monetary announcements. Keeping aside monetary announcements factor, knock-on effect can be captured if a trader knows on which asset the currency relies.
Assuming that Australian currency (Australian Dollars, AUD) relies greatly on gold, increase in gold prices can reflect increase in value of AUD and vice versa. This is not just merely an example. Australia is a third largest Gold producer in the world. In the past few years increase in prices of precious metals have shown a positive correlation with Australian Dollar; 80-90% positive correlation. A similar correlation is amongst USD and Gold. Increase in gold prices tend to devaluate USD. Thus, knock-on strategy in this regard will signal a trader to place a call option on AUD and put option on USD if the gold market indicates an upsurge.
Likewise, knock-on effect can also be applied on stocks and indices. For example, if a company, i.e., Apple announces a new tablet; it’s likely result in an increase of its stock price and consequently will decrease stock prices for it rival; for instance, Samsung.
There are many financial interrelationships to consider in financial markets, some may affect greatly and some may act in a consistent way. However, developing knowledge and understanding these relationships can greatly increase chances of a payout in binary option trading.