As the world gradually returned to normalcy and opened up from the Covid-19 pandemic, many analysts and traders predicted stability in the market.
However, that was not to be as Russia invaded Ukraine and threw the global markets into chaos. Rising inflation has also created panic which contributed to market volatility. In times as this, investors & speculators both have to use caution to avoid losses arising from their investments.
So, if you are a retail investor or a trader, then what habits should you cultivate to navigate in such volatile times? Here are some points to provide you with a guide during times of volatility as we find ourselves now.
1. Have a Plan
The saying ‘’he who fails to plan, plans to fail’’ becomes important.
Here you decide what you aim to achieve from the markets and set strategies in place to actualize them. Which instruments are you going to choose? What is the time horizon of your investment? And what returns are you expecting? What is your risk appetite? You can also see an investment advisor if you are uncertain about the course to take.
Your plans here must be realistic and be cognizant of the risks inherent in the market. You should not set unachievable trading goals. As part of your plan, you can decide to diversify into less volatile instruments, learn to hedge your risk etc.
Your plan should be in line with your risk profile and your financial goals. Is the goal to protect against inflation? Then you should have a balanced portfolio to protect against that.
2. Don’t Set Unrealistic Expectations of Returns
It is really important to understand what returns you are seeking from the markets. And how are you going to achieve it?
Inflation is rising globally & the CPI number in the UK rose 5.4% YoY in December 2021. Your investments should aim to minimize the market risk & provide you with a realistic rate of return which is closer to the rate of inflation, so you don’t lose the value of your money.
Having an unrealistic expectation of 20-30% returns from your investment will cause you to take excessive risks of which the downsides are really high. You should seek to create a balanced portfolio with low risk, even if the expected returns are lower.
3. Don’t Be Emotional
In times like this where there are quick changes in market prices & up & down movements, it is important to be emotionally stable. The fear of losing or excitement when the market favors you should not trump logic and rationality and influence your decisions.
Also, the fear of missing out (FOMO) should not cloud objectivity when making investment decisions. We understand these are times where the market can become bullish in a short time and “experts” are giving predictions constantly but these are times where having a clear head is important.
Don’t overpay for a stock just because you see its price going up. Be risk averse & ask yourself what will cause the price to go up more?
Always form the habit of ensuring your decisions about an investment are based on objective analysis of the market. In essence, keep your emotions out of your investing.
4. Apply Risk Management Strategies
There is no better time risk management strategies are more important than during periods of volatility. While it is important to be cautious at all times, it becomes even more important to be extra cautious during periods where uncertainty is very high.
If you are a trader, the most popular risk management strategy is the stop loss order. This feature in most trading platforms allows you to set a pre-determined closing price of your trades such that when the trade reaches that price, it automatically comes to a close. This habit is good for people who trade part-time and won’t have time to monitor their trades.
Aside from that, a stop loss order also brings a sense of confidence that despite the trajectory of price movements, your investment is secured.
For investors, risk management strategies include diversifying your portfolio into less risky financial instruments like bonds, commodities which can benefit from high inflation and cyclical stocks.
5. Keep Track of the News (Be Current)
Price movements in the market could also be influenced by news, events and happenings on the global scene. These events could be political, economic and social.
The analysis of these events will help you make a better judgement of the fundamentals & the economy.
Even if you are a trader who relies only on technical analysis, you should not ignore global happenings in the political scene especially during such periods of volatility. A major news announcement like the Feds increasing interest rate, Russia and Ukraine agreeing to a truce, OPEC announcing supply cuts etc. all have huge impacts on the market. Hence even if you’re a technical analysis trader, try to have a place for news announcement in your analysis.
6. Beware of High Leverage
Leverage is offered by brokerages to trade with borrowed funds. What this means is that it can amplify your returns if you are correct & amplify your losses if you are wrong.
Safe Forex Brokers UK’s research found that as high as 83% of UK retail traders trading CFDs lose at some of the FCA regulated CFD brokers. Most CFD brokers encourage retail traders to use high leverages. Almost all the regulated CFD brokers require traders to make small deposits of as low as £100 & offer leverage as high as 1:30 for trading currencies. But it is well known that most of the retail CFD traders lose, so traders must avoid leverage.
Leverage is often called a double-edged sword. While it can significantly increase your returns if your bias turns out to be correct, it can also amplify your losses if the speculation doesn’t move in the direction you predicted.
It is for the latter reason that traders should avoid instruments with high leverage during periods of volatility in the market. As a trader, you should only trade with leverage when there is stability in the markets.
During periods of uncertainty, avoid trading with high leverage as you are not certain of price movements. To put it simply, it is risky to trade using high leverage as your capital is on the line.
7. Document Your Trades
Do you know why chess players have to write down their moves when playing? It’s to know where they have made mistakes and avoid such in the future.
The same strategy applies to trading in the financial market. Document trading situations where you made the right decisions. Since losses are inevitable, also write down the situations where you lost out.
This will serve as a guide when trading in the future and help you understand market behavior. It will also prevent you from making wrong moves and help you estimate how much returns your trade can bring.
8. Do not Over-Trade
If you are a speculator or a trader, then it is important to be cautious during volatile markets.
Volatile periods call for caution. During such periods, the tendency to overtrade or see profit in the market is high. However, this period calls for patience and tact.
It is not a time when one can just enter the market without a clear opportunity. If it entails waiting out days or even months until there is a clear sight, then wait. Your decisions must be well researched and thought-out in order to avoid errors of impulse trading.
Also, avoid trading with large amounts during this uncertain period. Only trade with funds you can afford to lose.
In times like this, where the financial markets are experiencing uncertainty, it is important to cultivate certain habits to guide our decisions. This is not a time to rely on luck, guts or instincts.
As we all know, luck does run out and our instincts might be wrong. However, carefully thought-out analysis of the risks can help you minimize losses in such an uncertain financial market.
Read more:
Important Tips for Retail Investors & Speculators to avoid Losses in 2022