From the Desk of Evdokia Pitsillidou, Head of Risk Management at easyMarkets.
2016 was a highly unpredictable year for the financial markets. Brexit, the election of Donald Trump and the resignation of Italian Prime Minister Matteo Renzi were just some of the major headlines that drove the markets this year. These and several other developments will be at the centre of the 2017 financial storm. Against this backdrop, we decided to give traders five tips to prioritise financial fitness in 2017.
Diversification is one of those recommendations we hear ad nauseam, mostly because it’s true and we rarely ever do it. Financial diversification – the process of allocating capital in a way that reduces risk exposure to one particular asset or market might be the key to financial fitness in 2017 and beyond. EasyMarkets has done just about everything to increase traders’ ability to diversify their investments. We have over 300 markets to choose from, so there’s no excuse to put all your eggs in one basket. Forex, commodities, stock indices and contracts for difference (CFDs) are just some of the markets you may use to achieve diversification.
Monitor the Economic Calendar
Today’s financial markets are highly market driven. A high-profile news event, economic data release or monetary policy decision may set the market ablaze. Traders must be able to anticipate these moves in advance and prepare accordingly. Luckily, this isn’t particularly difficult to do. Start off by glancing at the economic calendar every day before you start trading. Monitor it carefully every single day for potentially volatile events, then research those events to get a sense of what might transpire.
Prioritise Risk Management
In the world of trading, you must manage risks to experience rewards. Risk management should be part of every fit trader’s regimen. This includes employing tools that may help you minimise loss and lock-in profit. Guaranteed stop loss, negative balance protection and take-profit orders might therefore be part of your everyday vocabulary. EasyMarkets took risk management a step further in 2016 by introducing dealCancellation, a tool that allows traders to cancel a losing position within 60 minutes and have any losses returned for a small fee.
Volatility is the ugly step-sister of the trading world that many market participants simply don’t want to talk about. Unfortunately, ignoring volatility won’t make it go away. In the era of high-frequency trading, computer-based algorithms and globalized markets, volatility is here to stay. Rather than be afraid of it, learn to trade it. The CBOE VIX (a.k.a. the “fear index”) allows traders to trade volatility tied to the S&P 500 – Wall Street’s foremost stock index. Put simply, volatility usually moves in the opposite direction of the S&P 500, giving you ample opportunity to buy and sell volatility. EasyMarkets recently added the VXX Fear Index CFD to its MT4 platform. Give it a shot if you’re interested in trading volatile market-moving events.
The final piece of advice on the road to financial fitness is skepticism. Be sure to have lots of it as a trader, as your day might be filled with sifting through fear mongering, poor analysis and a heavily biased media. Skepticism has a lot of unique advantages in the financial markets. Chiefly, it may help you avoid herd mentality, or the irrational euphoria that gets traders to do silly things just because others are also doing it. Herd mentality has led to massive asset bubbles and more devastating market crashes. It is the bane of the financial markets, and should be avoided at all costs. Since there’s no single tool or strategy that will overcome it, your best defence might be a healthy dose of skepticism.
A regimen centered on diversification, risk management, research and skepticism might help you become financially fit in 2017. Remember: trading is a marathon, not a race. Just as crash diets never work, the same applies to trading. Learn to pace yourself and don’t be afraid to embrace new markets and strategies in 2017. This is especially true if what you’ve done before hasn’t brought you success. After all, the definition of insanity is doing the same thing over again and expecting different results.