With markets in turmoil and the COVID-19 volatility continuing to affect the global stock market and currency exchange rate, basic trading norms have shifted considerably. Strategies that worked before are no longer as reliable or as profitable.
To succeed in this new paradigm, investors need to look beyond traditional trading styles and rules.
Here are five modified tips and tactics that are better suited to the new world of investing in which we find ourselves. They have been prepared by the experienced cfds trading team at Investous to help you grow your investments in these uncertain times.
Pulling out All the Stops
A stop-loss is one of a trader’s most important tools, regardless of market sentiment. However, its importance is even more critical now.
In response to the increased daily volatility, there has been a trend of investors widening stop distance. While this is an effective tactic, always keep in mind that it magnifies your exposure as well. If your position size exceeds your budget for withstanding losses, it defeats the purpose of creating a stop-loss in the first place.
You can adapt your profit strategy with this method, too. It can be tempting to abandon your profit targets when the volatility works in your favor. Instead of just riding the wave, specify a trailing stop to lock in your profits.
From forex to commodities to derivatives, leverage is one of the most effective ways to magnify your returns without injecting additional capital into your trading account. Since the daily range of movements is often distinctly higher than in the pre-COVID-19 period, leverage decisions based on reliable indicators can significantly boost your profits.
However, leverage also magnifies losses by the same factor and you should make leveraging decisions carefully based on the latest financial news and data.
In normal times, it was a generally reasonable and risk-free practice to leave trades active even when you were not closely monitoring finance industry sentiment and market movements. That is no longer the case now that both US and global stocks and currencies are susceptible to major overnight movements.
In a perfect world, you would be able to monitor the data and make investing decisions as events unfold in real time. However, that scenario is impossible even for professional traders. The safer option now is to liquidate your positions at the end of each day. While this approach may curtail your profits, it also insulates you against losses.
Equity is the value of your assets minus the liabilities. Every time that you expose an asset you own to the market, you are exposing it to the risk of the market’s fluctuations and corrections.
The average casual trader risks between 3% and 5% of his or her account value for each trade. An extended series of successive downward moves by the market can potentially reduce that account value to zero. In a less extreme scenario, it could still wipe out a significant fraction of your account.
While this was virtually impossible before Covid-19 spread its tentacles out of China, it is a reasonable risk to consider today. We would advise limiting your exposure to the market to between 1% and 2% now. Investous may revise this figure if there is tangible evidence of market fundamentals strengthening in the future.
Orders are instructions to buy or sell when the value of a stock hits a certain value. They are the best tool in an investor’s hands when it comes to combating the volatility that COVID-19 has triggered. There are two basic types of orders – market orders and limit orders.
A market order is an order to buy or sell as soon as it is issued. It is the preferred method of traders who have the opportunity and ability to monitor market trends and prices in real time.
Limit orders are instructions to buy or sell when the value of a stock, currency exchange rate, commodity or derivative touches a predetermined value. They allow traders to buy and sell multiple assets simultaneously when favorable opportunities present themselves.
Successful investors are marked by their attention to details and the ability to keep up with local and global developments. If you need a guiding hand in these uncertain times, contact Investous for perceptive and effective insights.