Trading in uncertain times

Trading successfully in uncertain times

“If you invest nothing, the reward is worth little.” – Richelle E. Goodrich

The fact that we are living in challenging but exciting times in an understatement. There is no doubt that it is tempting to close all our trading positions and place the money in safe-haven stocks or a savings account. However, even though the global financial markets are very volatile and unstable, there is still money to be made. Therefore, the question that begs is how do we trade successfully in the current market conditions? In other words, what strategies do we utilize to mitigate our exposure to risk?

The impact of geopolitics and socio-economics on the financial markets

Investor confidence plays a significant role in whether the global capital markets rise or fall. However, the global geopolitical situation does not affect the markets until a crisis happens. Additionally, the markets tend to overreact during the crisis and underreact when the crisis is looming. According to Pascal M. vander Straeten, fund and risk managers are only concerned about the impact of the crisis on the revenue of the funds that they manage.

A typical example is that of the markets’ reaction to the outcome of the Brexit vote. Markets assumed that the majority of UK citizens would vote to stay in the European Union. Therefore, the markets did not price in the fact that the “leave campaign” would win. As we all know, to everyone’s shock and horror, the majority of UK voters chose to leave the EU.

Consequently, the British Pound (GBP) dropped by at least 10% against the US Dollar (a 31-year low). Fortunately, it only declined by about 7% against the Euro. One of the reasons why the GBP dropped after the results of the Brexit referendum were released is because fund managers and investors were concerned that the vote would destroy UK business.

Successful trading in troubled times

As stated above, the temptation is powerful to sell off all of our investments to ensure that we don’t lose money. However, when we spoke to a Lionexo account manager, he stated that selling off investments is counter-productive when our goal is to grow our investments and increase our wealth.

Furthermore, when asked how he would go about investing in the current volatile market conditions, his response was that he would change his trading strategy to a very short-term strategy. In other words, investors should not end their work day without closing all of their trading positions; ergo, they will not be caught unawares by the geopolitical events that take place after business hours.

Additionally, the Lionexo account manager suggested the following tips to help us place income-generating trades:

Research, research, research

It is critical to conduct a thorough investigation into the price movements of the underlying asset over a fixed period. Technical indicators such as momentum indicators and oscillators are very good at providing such information. Furthermore, it is vital to research the background of the asset, how well it is performing with regard to the financial market as a whole as well as in relation to its market sector peers.

Make small investments

The fact is that the greater the market volatility, the higher the risk. Therefore, to mitigate the risk of losing our entire investment, it’s wise to invest small amounts in a single trade. Ergo, if the market moves in the opposite direction, we won’t lose significant sums of money.

Volatility is not uncertainty

The Traders-Mag.com published an article on 31 May 2017, titled “Trading in Uncertain Times.” In it, the author differentiates between volatility and uncertainty. For example, the volatile markets can cause us to be uncertain about our trading decisions. Volatility is not uncertainty. Volatility is when the markets change direction rapidly because they are reacting to a multitude of geopolitical crises.

On the other hand, uncertainty is caused by a situation where a lack of information. Furthermore, as market investors, we need to be confident about what investments to make based on the investigations and research conducted before placing a trade.

Final words

There is no doubt that trading in volatile and unstable global financial market conditions can be anxiety-inducing as well as stressful. However, armed with the appropriate knowledge as well as clear goals, we will be able to trade successfully, irrespective of the state of the global financial markets.

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