CFDs are growing rapidly in popularity, and many brokers and exchanges now offer them along with binary options and Forex trading. But what exactly are CFDs? And can you trade them with the same strategies that have worked for you with other types of trading instruments. [su_service title=”What are CFD’s all About?” icon=”icon: money” icon_color=”#59902c” […]
Follow the Leader
Many binary options traders thrive on volatility, but if this isn’t your thing, that certainly doesn’t mean that you cannot be just as profitable. This is where the Follow the Leader strategy comes into play. It relies less on quick moving technical indicators and more on trends and momentum. It also takes the market pull effect into account, which is where it gets its name from.
Best Way to Apply This
The Follow the Leader approach rests heavily on a concept called the market pull effect. This basically states that assets do not fundamentally operate in a vacuum. When one asset moves in price, it necessarily must “pull” one or more assets with it. This relationship can be direct or inverse, so it’s important to have a firm understanding of how one asset affects another. When using this for binary options trading, you should also know how much lag there typically is between when the first asset moves and when the other begins to be impacted.
Your first step is to identify relationships between assets. For example, you could look at the S&P 500 and the U.S. dollar as an easy one. When one goes up, the other tends to go down. The next step is to figure out how direct, or indirect, the correlation is. This is an inverse relationship as they are not moving in the same direction, so the correlation calculation should be a negative number. You can use advanced statistical software to come up with your own numbers here, or you can look them up online. To be more precise, obtaining your own software is best as this is a number that will be in constant flux. The closer to -1.0 the correlation is here, the more immediately the prices will be impacted. If for every 1 percent the dollar moved up, the S&P moved 1 percent downward, and this happened constantly, there would be a perfect -1.0. In reality, it’s much different than this, and with recent months dictating the numbers, the number will typically be closer to 0 than to -1.0. All of this data is important to have, as it determines how urgently you should act with your trades.
The best way to show how to use this is with another example. The relationship between the Australian dollar and the price of gold have moved in lockstep for a very long time, having a fairly large positive correlation, depending on the day. When the Aussie moved one way, it was easy to say that gold would do the same, and vice versa. This made trading either fairly predictable. However, more recent data says that this correlation is no longer as strong as it once was. This began in late 2014, and has become less predictive since. It still exists as gold is a large part of Australia’s success in the international economy, but it is not as accurate as it once was for basing short term trades off of. Monitoring recent statistics, then, is a huge part of the success of this strategy.
What Can Go Wrong
The biggest drawback of this strategy is that it is time sensitive. If you don’t have a timely correlation number to act on, your information is going to be closer to a gamble than an educated prediction. As such, many traders find that using this strategy in conjunction with other, more precise measures, is the better way to establish long term success. However, it does help paint predictive models in a more accurate way than technical and fundamental data alone can as it illustrates a more comprehensive view of how assets interact with each other in a dynamic economy.
Calculating your own statistics is also not easy for beginners. Special software must be used, and this can be costly and time consuming to punch in your own numbers. However, when used correctly, it is a worthwhile use of time and money.Try trading with a Trusted Broker of our Choice