The following is a guest blog post:
The financial markets have got off to a bad start in 2016 with the value of the major stock indices and commodities taking a free fall. But is it entirely a bad start? Yes, it may be bad for those who are long on these assets but for short sellers, 2016 could not have started on a better note.
Whenever there are market upheavals, there is the tendency for most retail traders to simply stay out and in their words, “wait for markets to stabilize”. This is not really a good perception to hold on to. Historically speaking, the financial markets have always had periods when they go haywire, and those on the right side of the equation have always come out big winners. Money is made when markets are volatile and there are many ways to play volatile markets.
Take for instance the correlation between the US Dollar, commodity currencies, oil and other commodity assets. The stronger dollar, coming off the December rate hike, has hammered the value of the emerging market currencies which are commodity based. So with dollar strength, there are many possibilities to trade.
To be able to trade this period of volatility profitably, you need access to a news source and sound analysis. You can follow Trade 24 on crunchbase to get an overview of happenings in the financial markets and know where the action is taking place.
How to Trade Super-Volatile Markets
It must first be emphasized that trading volatile markets is risky business and is not for everybody. Indeed, it should not be attempted by those who are new to the market and those lacking the required experience. If you understand how to interpret the news and the charts and you have some experience, then you can attempt it.
a) Risk management is the hallmark of every trading endeavour which is successful. What does risk management do? It ensures that the trader’s account survives to trade another day even when there have been losses. So the trader should use low risk as much as possible.
b) Look for correlations. Instead of trading copper, trade the AUDUSD for instance. Australia produces a lot of copper, most of which goes to China. Let’s face it; economic news from China makes up a large component of what is driving the present market upheaval. So by trading correlated assets, you may avoid trading the very volatile assets directly and trade the more manageable correlations. You can easily do this on brokerages like Trade-24 that perform investment management and financial services.
c) Before you trade, you need to look at the long term outlook for the asset. To do this, use a daily chart. This will show you what the asset has been doing in the past few months to a year, and can help you make some projections as to what the asset will do. Keeping a long term outlook helps the trader wade through the market intraday noise and press towards a more definitive target.
Here is an illustration of how a typical trade may look like, and we will use an asset that has experienced some market volatility to showcase this.
Ever since the Fed Reserve started singing the song of a possible rate hike, the USD had been gaining over the ZAR. When the rate hike was eventually announced, the USDZAR hit unprecedented levels.
Raised US interest rates would lead to a stronger dollar and weaker commodity prices. Therefore, we would expect the USD to gain strength over currencies such as the South African Rand (ZAR), an exotic currency commonly traded on the forex market. So we expect the USDZAR medium term outlook to be bullish.
So a discerning trader would look for periods when it would be safe to buy the USDZAR. A good measure of support and resistance would be the Fibonacci retracement levels. As we can see from the hourly chart below, there were at least three of such opportunities on the chart.
With low risk and being able to time a bounce of price off the supporting Fibo levels, the trader can ride the storm of the price move like a surfer, knowing that it would more likely than not, move in the direction of the main trend.
Markets may be volatile, but there will always be an opportunity to make some good money. Remember to keep an eye on China; the last may not have been heard from that economy yet.