As the world slowly returns to normal and the Covid-19 epidemic unfolds, many analysts and traders have predicted market stability.
However, it was not until Russia invaded Ukraine and disrupted world markets. Rising inflation has also created panic which has contributed to market volatility. At this point, both investors and speculators need to be careful to avoid losses arising from their investments.
So, if you are a retail investor or a trader, what habits should you develop to navigate during such turbulent times? Here are some points to guide you in times of turmoil as we now find ourselves.
1. Have a plan
The phrase “he who fails to plan plans to fail” becomes important.
Here you determine what you want to achieve from the market and set the strategies to implement them Which instrument are you going to choose? What is your investment horizon? And are you expecting a return? What is your risk appetite? If you are unsure about taking the course, you may want to consult an investment advisor.
Here your plan needs to be realistic and be aware of the underlying market risk. You should not set unattainable trading goals. As part of your plan, you may decide to diversify into less volatile instruments, learn to hedge your risk, and so on.
Your plan should be consistent with your risk profile and your financial goals. What is the goal of protection from inflation? Then you should have a balanced portfolio to protect against it.
2. Don’t set unrealistic expectations of returns
Understanding what you want from the market is really important. And how are you going to achieve this?
Global inflation is rising and in December 2021 the number of CPIs in the UK increased by 5.4% year on year. Your investment goal should be to reduce market risk and give you a realistic return that is close to the inflation rate, so you do not lose the value of your money.
The unrealistic expectation of a 20-30% return on your investment will force you to take excessive risks whose negative aspects are really high. Even if the expected return is low, you should build a balanced portfolio with low risk.
3. Don’t be emotional
At a time when market prices and up and down movements are rapidly changing, it is important to be emotionally stable.. Your reasoning and rationality should not be underestimated and your decisions should not be influenced when the fear or excitement of losing is supported by the market.
Also, the fear of losing (FOMO) objectivity should not be clouded when making investment decisions. We understand that at this point the market may become bullish in a short time and “experts” are constantly predicting but these are the times where it is important to have a clear head.
Don’t pay extra for a stock because you can see that its price is rising. Avoid risk and ask yourself why the price will go up further.
Always make it a habit to make sure your decisions about an investment are based on an objective analysis of the market. In short, keep your emotions out of your investment.
4. Apply risk management strategies
There is no better time for risk management strategies than the period of instability. While it is important to be vigilant at all times, it is even more important to be extra vigilant over a very long period of time.
If you are a trader, the most popular risk management strategy is stop loss order. On most trading platforms this feature allows you to set a pre-determined closing price for your trade so that when the trade reaches that price, it automatically closes. This practice is good for people who trade part-time and do not have time to monitor their trades.
In addition, a stop loss order also brings a sense of confidence that your investment is safe, despite the price movement.
For investors, risk management strategies include diversifying your portfolio into less risky financial instruments such as bonds, products that can benefit from high inflation and cyclical stocks.
5. Stay up to date (stay current)
Market price movements can also be influenced by global news, events and happenings. These events can be political, economic and social.
Analysis of these events will help you better judge the fundamentals and economics.
Even if you are a businessman who relies solely on technical analysis, world events should not be ignored in your political scene, especially during times of instability. Big news announcements such as the Fed raising interest rates, Russia and Ukraine agreeing to a ceasefire, OPEC announcing supply cuts, etc. have a huge impact on the market. So even if you are a technical analysis trader, try to keep a place for news announcement in your analysis.
6. Beware of high leverage
Leverage is provided by brokerage to trade with borrowed funds. This means that if you are right, it can increase your returns and if you are wrong, it can increase your losses.
A study by Safe Forex Brokers UK found that up to 83% of UK retailers traded CFDs and lost to FCA-regulated CFD brokers. Most CFD brokers encourage retailers to use high leverage. For almost all regulated CFD brokers, traders have to make small deposits of up to £ 100 and offer leverage up to 1:30 for trading currencies. But it is well known that most retailers lose CFDs, so traders need to avoid leverage.
Leverage is often called a double-edged sword. While this can significantly increase your return if your bias proves to be correct, it can further increase your losses if the assumption does not advance your predictions.
This is due to the fact that traders should avoid instruments with high leverage during market volatility. As a trader, you should only trade with leverage when the market is stable.
In times of uncertainty, avoid trading with high leverage because you are not sure about price movements. Simply put, it is risky to trade using high leverage because your capital is on the line.
7. Register your business
Do you know why chess players have to write their moves while playing? They need to know where they went wrong and avoid it in the future.
The same strategy applies to trading in the financial markets. Document trading situations where you have made the right decision. Since loss is inevitable, write down the situation in which you lost.
This will serve as a guide when trading in the future and will help you to understand the behavior of the market. It will also prevent you from taking the wrong step and will help you to estimate how much return your trade can bring.
8. Do not trade excess
If you are a speculator or trader, it is important to be careful during volatile markets.
The volatile period calls for caution. During such periods, the market tends to be over-traded or profitable. However, this period calls for patience and strategy.
This is not a time when anyone can enter the market without a clear chance. If you have to wait a day or even a few months until it becomes clear, wait. Your decisions must be carefully researched and thought out to avoid the pitfalls of impulse trading.
Also, avoid trading heavily at these uncertain times. Only trade with funds that you may lose.
At a time when financial markets are facing uncertainty, it is important to develop specific habits to guide our decisions. This is not the time to rely on luck, courage or instinct.
We all know, luck runs out and our instincts can go wrong. However, careful thought analysis of risk can help you reduce losses in such uncertain financial markets.