As any surfer will tell you, calm seas aren’t necessarily a good thing. To get a chance at surfing the most thrilling waves, you need the tides to be choppy and changeable. Online trading in forex, commodities, cryptocurrencies, or company shares is no different because, in order “To make money in the financial markets, there must be price movement”, in the words of Charles Schwab International.
Therefore, when people talk in worried tones about the markets being volatile, they mean, not that prices are moving, which would be normal and desirable, but that their movements are unusually quick and drastic. Analysts commonly offer their views on how financial traders should deal with such conditions. Some of them advise, for instance, setting more spacious stop-loss orders on your trades to save them from being triggered by big single-day price movements. Others suggest keeping your trades small, so as to limit your downside risk.
Hedging strategies like these are something every responsible trader should consider doing but, if all you do is sit on the sidelines when markets are jittery, you stand to lose out on some great opportunities. Meta Platforms CEO, Mark Zuckerberg, says, “In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks”. Similarly, if you saw a surfer just sitting on the beach when the waves start to mount high, you might tell him to wonder why he’s in the business in the first place. Let’s discuss some of the ways you can surf the waves of volatile markets towards your personal financial goals.
Getting Used to the Conditions
Before the pandemic made its mark in 2020, we had been accustomed to years of steady growth and timid inflation which made the job of expanding your wealth relatively straightforward. During these years, “Economic downturns were met with monetary and fiscal stimulus that provided a backstop for financial markets”, in the words of BlackRock. Late last year, BlackRock observed that this era was coming to an end. “Today”, they explained, “that’s started to change with the re-emergence of macro volatility and distinct policy trade-offs between growth and inflation”. In particular, they pointed to a more influential role that inflation would take in maintaining volatile economic conditions around the globe.
More recently, in September 2023, we saw some serious and diverse market volatility emerging. WTI crude oil shot up, near the end of the month, to $95 a barrel. A trend of mass strike action swept the USA, and this “could add pressure to wages and, in turn, prices”, warned JP Morgan. And China’s sluggish economic reopening was restrained by its persistently problematic property market.
Volatility in the markets can spur you into re-evaluating your financial goals and strategies. This can potentially turn you into a better, more skilled trader than you were before. “Market volatility should be a reminder for you to review your investments regularly” and bolster your “exposure to different areas of the markets”, says Fidelity Investments’ Ann Dowd. Indeed, learning how to properly diversify your portfolio is an old-time approach to volatile markets.
Besides this, strategists suggest learning about the specific asset you’re trading. How does it normally behave in various types of economic environments? It may be that the overall market is choppy, but individual assets still retain their unique characteristics. When the US banking industry was shuddering earlier this year after three big banks suddenly went belly-up, “Gold stood out… as one of the best performing assets year-to-date”, said JP Morgan. The shiny metal is known for retaining its value when other assets are losing theirs.
As to your general approach to trading when markets are volatile, experts recommend refusing to react strongly to financial news reports. Instead, they suggest returning to your plan and refining it more and more thoroughly. Trading from the emotions of fear or greed often tends to lead to disappointment.
Touching on a couple of specific strategies for stocks in volatile times: One of them, called equity-market-neutral strategy, advises you to buy undervalued stocks and sell overvalued stocks within the same sector, or that are closely related in some other way.
Another one, called relative value arbitrage, seeks out two stocks that normally trade in parallel with one another. When their prices diverge by about 5%, you can anticipate they will soon start to converge again. You would do this by opening a buy deal on the lower-priced stock and a sell deal on the higher-priced one. Later on, when prices settle down to their happy medium, you would close both deals.
There’s also a specialized branch of trading suited to taking advantage of volatility – CFD trading. In this kind of trading, you open a contract with your broker on the price of an asset – whether it’s a forex pair or a commodity or a company share – between time X and time Y. Choose a buy deal if you expect prices will rise, or a sell deal if think prices are going to dip.
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