US Binary Option SitesUK Binary Option Sites

Correlations in Binary Options

Binary Options CorrelationsCertain assets in the binary options market share correlations with other assets and market occurrences, making it possible to predict the movement of one asset based on the performance of its correlated asset or event.

In this article, we examine the various correlations that exist in the binary options market and how traders can benefit from them.

Examples of Correlated Assets

The following assets are seen to be closely correlated, and so will present correlation-based trading opportunities in the binary options market.

  • China and the AUDUSD
  • AUDUSD and Copper
  • EURUSD and Crude Oil
  • Gold and Inflation
  • Sovereign Debt and Currencies

Here is an explanation of the various correlations in binary options and how they can be traded.

  1. China and the AUDUSD

    China is currently responsible for 40% of the world’s production, and to fuel such an industrial hub, the country has to depend on imports from a country which is in close proximity to it and also has a large supply of raw materials to feed its industries. Australia is a country that satisfies these two demands, making it China’s biggest trade partner. China’s economic growth is therefore going to impact heavily on the Australian economy. Increased growth of China’s economy will mean a boom for the Australian commodity export dependent economy, leading to a rise in the value of the Aussie. When the Chinese economy slows, it will impact negatively on the AUDUSD.

    The Trade

    Binary options traders will need to watch all news reports that give an indication as to where the Chinese economy is heading, and then trade the AUDUSD subsequently. Some of these news reports coming out of China are:

    • HSBC Manufacturing PMI (Flash and Final)
    • Trade Balance
    • Consumer Price Index
    • Industrial Production
    • GDP

    The correlation between China and the AUDUSD is a positive one. All the economic indicators mention above correlate in a positive fashion with the Aussie. So numbers that beat the consensus numbers should boost the Aussie’s value, and the AUDUSD should be traded accordingly.

  2. AUDUSD and Copper

    Following on from the correlation discussed above, copper binaries provide another example of a correlation between a commodity, a currency pair and an economy. China is the largest buyer of Australian copper. The correlation between China, copper and the AUDUSD is thus a positive one. Indeed, if the trader does not want to trade the AUDUSD in response to Chinese economic growth indices, copper binaries present a viable alternative. A good measure of these correlations is by the use of the Shanghai Index asset (SSE180).

    The trader should always be on the lookout for when copper, the AUDUSD and the Shanghai Index are in close correlation, and periods when this relationship disintegrates transiently.

  3. EURUSD and Crude Oil

    The relationship between crude oil and the USD is one which has been thoroughly explained in many online articles and trading websites. To recap, the USD has an inverse relationship with crude oil, and the EURUSD represents one great way to trade this correlation. The price of crude oil is dictated by forces of demand and supply.

    Demand for crude oil is driven by growth. Growth will need more crude oil and its derivatives to fuel expanding industries and all that come along with it. Supply is determined by the quotas set by producing countries, as well as availability of the product if there is a major crisis in countries where it is produced. We saw an example of the latter during Libya’s civil war of 2011, when crude prices spiked rapidly as a result of shut-in of production from this country which is responsible for 2% of the world’s supply.

    So what is the correlation play here? The USD will be negatively affected by higher oil prices. This is because the US is a net importer of crude oil, and more money spent on crude imports will increase the US trade deficit, which is a USD-negative event. Weaker oil prices mean that less money will be spent on crude imports by the US, reducing the trade deficit (a USD positive event).

    The Trade

    Therefore, the trader can trade the change in crude oil prices on the binary platforms as follows:

    1. CALL option on the USDCAD or PUT option on the EURUSD if oil prices weaken.
    2. PUT option on the USDCAD or CALL option on the EURUSD if oil prices strengthen.

    From my experience, the EURUSD has proven a resilient asset to trade this relationship because the Euro is crude oil-neutral. This allows the interplay between the USD and crude oil to fully manifest itself. The Canadian Dollar lends itself to this correlation because it is home to the second largest crude oil reserves (after Saudi Arabia), and is the greatest crude exporter to the US, accounting for more than 60% of crude oil exports to its southern neighbor.

    The crude oil contract on the NADEX binary options platform is the Western Texas Intermediate Light Sweet Crude, which moves closely with the Brent Crude contract.

  4. Gold and Inflation

    Gold has traditionally been treated as a safe haven asset which traders buy into in times of economic crisis, or in times when market participants are in capital preservation mode. However, when capital is depleted (as it will be if the crisis lasts long enough), traders may then trade in their gold stores for cash, leading to a gold sell-off. So it is not a wise idea to trade gold simply on expected demand during crisis periods in the financial markets. Rather, it makes more sense to trade gold as an asset correlated to inflation. This is because gold is better used as a hedge against inflation and not just as a safe-haven, capital preservation asset.

    Central banks commonly use interest rates as a way to defeat inflationary pressures. So whenever there is an expectation of inflationary pressure on the economy of a country, it brings an expectation that rates will go up. This brings on a risk-on sentiment to the market, with traders willing to back up such expectations with an increase in gold demand. We also expect the risk-on commodity currencies to go up in value, especially that of the AUDUSD to which gold is 90% correlated. Australia is the world’s largest producer and exporter of gold, so its currency shares a positive correlation with gold.

    Therefore, it makes sense to either trade gold, or the AUDUSD in correlation to inflation. You may ask: why the USD? This is because gold and the USD are inversely correlated.

    The Trade

    For the binary options trader, watch the inflation reports coming out of Australia and the US, and also watch the Reserve Bank of Australia (RBA) statements regarding their plans with regards to interest rates, looking closely at the concern they have over inflation. If you see a hawkish tone in the statement following a rate decision (increased or left unchanged with a chance for increase in future), get ready to make a technically-directed entry into gold or the AUDUSD on the CALL side of the trade. A dovish tone from the RBA will have the opposing effect, and should get the trader considering a PUT trade.

  5. Sovereign Debt and Currencies

    The sovereign debt crises witnessed in Greece, Ireland, Portugal and Spain and the hammering that the Euro took as a result, shows how sovereign debt, credit ratings and the value of the affected currencies are all correlated.

    Credit ratings are assigned by three major credit rating companies: Moody’s, Fitch and Standards & Poor (S&P). The ratings simply tell creditor nations about the ability of a government or other entity to repay loans taken as sovereign debt (government bonds). National governments are supposed to have the highest ratings because in theory, they are too big to default. But what happens when there is a massive threat of default as hung over Greece and Ireland in 2010 to 2013? A massive loss of investor confidence follows, and as investors flee all investment vehicles in a country, they will dump that country’s currency and look for other more viable alternatives. This is what happened to the Euro, as it fell from 1.5153 to the USD in Nov 2009 to as low as 1.1847 in June 2010 at the height of the crisis.

    Mounting trade deficits and unfunded liabilities are another kind of sovereign debt problem with the same effect. If deficits are seen to be rising to unsustainable levels, it makes the likelihood of a credit rating downgrade possible, and this will have a dampening effect on that country’s currency. The US was hit by a rating downgrade not so long ago.

    Binary options traders should begin to look at the emerging correlation between sovereign debt and the value of a currency. A country’s economic metrics can be tracked, and the Organization for Economic Cooperation and Development (OECD) maintains such records and this is something that binary traders should look out for.


It can be seen that most of the correlations are fundamentally based. This allows traders to get a long-term direction on the asset that they intend to trade based on these correlations, and look for possible trade entry spots to profit from them.

$postMetaValue=get_post_meta($postId,"meta_key",true);if($postMetaValue=='pictureID') { //do as you want }