One of the best trading strategies I know is fading the rally with binary options after a significant central bank move. It should be plainly obvious that market forces were clearly aligned with strong demand for dollarsprior to the move by the Fed. It stands to reason that there was increasing demand pressure for dollars in foreign banks to fund obligations. My question to all is… what has changed?
US Dollar Demand Remains Strong
While the Fed move has increased the availability and reduced the cost of dollar funding it has done nothing to assuage the DEMAND for dollar funding. This means that yesterday’s move has merely delayed (rather than prevented) the inevitable day of reckoning in foreign dollar markets. Given the known cancer that is plaguing the US dollar (read: the euro) demand will continue to be strong. With what we know about the basic relationships between funding currencies (risk off) and risk on investments I believe what we saw yesterday was a significant number of short covers which will inevitably be put back on once the market settles down again.
Three Ways to Use Binary Options Trading After Fed Intervention
There are multiple ways to use binary options trading strategies after a major central bank intervention. All of these strategies fall on the idea of playing the near term reversal of the market jolt. The major banks most famous for intevention reversals are the Fed and the Bank of Japan. Having said that the highest rate short term investment option for many investors are binary options.
Under current circumstances the three most logical plays for an intervention reversal trade are
- Buying Put Options
- Put options on major indexes is one way to capitalize on expected significant short term negative movements but requires a decent amount of capital at risk
- Trading the VIX
- There are several ways to use or trade the VIX
- Binary Options
- This is the least capital intensive way to make a high yield short term gain on a central bank intervention reversal
There Is No Guarantee of Any Trading Strategy Working but Quick Action Can Yield Profits
Like any investment strategy there is no guarantee of success. On the other hand having several options in your trading arsenal gives you greater chance of capitalizing on short term market opportunities. I hope you have found these ideas either helpful or otherwise thought provoking. Any or all of these trading strategies can result in loss of capital but they also offer the possibility of earning high rates of return in short amounts of time with modest capital risk.