The knock-on effect is a trading strategy that is closely related to the market pull effect. In the market pull effect, you see one asset having a direct impact on another asset. In the knock-on effect, the impact is more indirect, and often involves following a chain-reaction of events, similar to watching one domino knock another down a few seconds later through a series of other events. If you understand the market pull effect, the knock-on strategy will be much easier to understand. Either way, before you start using this, it is important to know what to look for and, of course, what to look out for.
The Way You Should Approach This Method
The knock-on effect presumes that you have an intimate understanding of the relationship of how different assets interact with one another. For example, a very broad example would be the relationship between the S&P 500 and the U.S. dollar. When one goes up, the other goes down. This is the market pull effect in a nutshell. With the knock-on effect, you are looking for more of a chain reaction. So, if you are looking at the S&P 500, you would look at the relationship that this has with the U.S. dollar, and then look at another asset that is impacted by the U.S. dollar, such as the price of gold, which is also an inverse relationship. With the knock-on effect then, you are looking at the relationship between the S&P 500 and gold.
The knock-on effect can be as complex or as drawn out as you want. If you want to stick with the previous example, you could then look at the relationship between gold and the Australian dollar, and relate the S&P 500 to the Aussie.
The strength of this strategy is that you can use your vast knowledge of one asset and effectively trade many other assets just because you have a firm grasp elsewhere. It opens up many doors for observant traders, thus giving you more opportunities to open up positions at 24option throughout the course of the trading day.
It all comes down to relationships, and there are an infinite number of combinations that you can create here. The simpler the chain of dominos is, the better, as you will see in the drawbacks section.
Nothing is Perfect
There are some major drawbacks to using the knock-on strategy. The first is from a pure mathematics standpoint. Correlations are measured on a scale of -1 to 1, with -1 being a perfect inverse relationship, and 1 being a perfectly in sync relationship. 0 indicates no relationship at all. What ends up occurring when you set off the domino effect with this strategy is that there are slight changes between the correlation numbers from asset to asset, and the relationship from one end of the chain to the other is not exactly what it seems. You end up acting on imperfect data, and the end result is that your trades are never going to be quite as accurate as they should be at first glance. This has the potential to negatively impact your correct trade rate, and hurt your profitability over the long run, something that you obviously want to avoid.
It is possible to create an accurate chain of correlations here and to summarize it in a single number, but this involves complex mathematics and most people will find that this is more of a waste of time and energy than it is helpful.
Whether you want to use this strategy or not is up to you. Yes, there are some major issues with the strategy but there are also a few benefits. Be sure that you understand the risks associated with this very well before you use it.
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