During times of uncertainty, it can become more difficult for traders to know which way to turn, particularly for shorter-term investors and those relatively new to trading platforms.
The fallout from the pandemic would be enough for anybody attempting to travail global markets: supply chains have upturned commodity expectations, national debts have skyrocketed, and inflation is soaring.
This makes FX markets unpredictable and ‘safe haven’ assets like gold more prone to volatility.
Indices can be all over the place, and the addition of a European conflict that involves a nuclear power – one that also happens to be one of the world’s largest gas and oil exporters – makes things especially unsettling. But there are ways for even short-term traders to keep a cool head.
The first rule is to read, read, read. The speed at which the European conflict is evolving is such that assets and indices react instantaneously to breaking news.
While it is impossible to predict the news, it is possible to watch, read and listen to a range of news sources and financial analyses from multiple points of view.
What Russian analysts in Moscow say about markets may vary from how things are being reported in other parts of the world. The important point is to take on board as broad a set of perspectives as possible.
For example, further unforeseen sanctions against Russia could affect any number of markets – it’s impossible to accurately predict, so the most important thing is to be ready for any movement and diversify investments accordingly.
Knowledge is power
Diversity of insight is also essential in helping to understand where to diversify assets – because traders of all kinds should be spreading investments like never before.
It is essential at the current time to stay as diverse as possible – and manage risk ruthlessly. It’s important for those using trading platforms to protect their accounts with prudent money management and diverse asset classes when market sentiment is subject to such rapid change.
Of course, there are ample short-term opportunities in heightened volatility, including buying when the price of an investment is down purely because of market volatility: if the fundamentals of the business are unchanged, then a sudden downward dip because of market jitters can be a good time to buy.
Watch the Fed
For FX traders, it is advisable to invest regularly to benefit from dollar-cost averaging. Even though it can be tricky to time the market well during periods of volatility, it is possible to smooth out entry points by consistent investing.
It is also important to keep a keen eye on everything the Fed does – and on what is happening to inflation in the USA and around the world.
The Fed debated for a long time that inflation was transitory, and they were right. Inflation was mainly caused by supply chain bottlenecks accompanied by extra spending due to increased savings and stimulus packages during quarantine. But now, with skyrocketing oil prices, inflation will rise even higher.
So, it’s time to act. Markets expect the Fed to increase hikes, but they don’t know the accurate number of hikes or basis points.
So, markets will react based on the number of hikes. If the Fed increases more than expected, USD and US bonds should strengthen while stocks and commodities weaken.
With such volatile markets and various trading opportunities arising from increasing uncertainty and geopolitical instability, at 4T, we’ve seen a huge range of different reactions and trading volumes increase.
The majority of traders bought safe havens such as gold and Japanese yen, while some speculated on oil and effected currencies.
Self-care
The impact of Fed hikes can be dramatic and unsettling, not just on FX trades and general market sentiment but also on a trader’s sense of risk tolerance and peace of mind.
Stress can lead to bad decision-making, which is why all traders need to review their sense of risk tolerance.
This is different from risk capacity, which is the trader’s ability to take a financial loss (which applies whatever the market conditions).
Risk tolerance can change when volatility hits because it brings the reality of loss into a much sharper focus.
We can also manage our risk tolerance by making shrewd behavioral observations and adapting how and when we trade.
Adapting when we trade can be especially useful in keeping a cool head. The most volatile time of day for traders is often during the first and last hours of a trading session – so to keep a cool head, it can be a good idea to wait for the dust to settle in between the hiatus of opening and closing.
It’s also helpful to adopt a more defensive attitude – such as trading in smaller positions and scaling in or out by buying and selling in smaller increments to reduce exposure.
Remember, stop orders and stop-limit orders are another way of mitigating risk by removing the heat of emotion from the job.
Hamzeh Ajjour, CEO of 4T.
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