Forex Trading During a World Crisis
Investors tend to pull out of the markets during a world crisis or recession, leaving foreign exchange (FX) traders the most exposed. Here are a few key questions to answer when contemplating your portfolios:
1. Can you afford to lose your full position?
FX traders have an extremely high-risk tolerance, but it doesn’t mean they can or should lose their entire investment portfolio. Like all traders, FX traders are faced with heightened risks. If you are losing money in the markets, you have to try and get back in.
But you may have to sell your assets to cover the losses, which could put you on the verge of losing more than you originally invested. We advise our clients to put a loss in their capital allocation objective rather than in their trading accounts.
2. Do you have a fixed asset allocation (FAI) strategy?
FX traders can have a more concentrated portfolio than equity investors. A retail investor investing in FX has a minimal time horizon to reallocate assets. Those who hold long-term positions, such as interest rates and currencies, need to make timely moves to catch falling assets.
However, a long-term investor can capture the appreciation of the assets while shorting them for a change of market trend, for example. It would help if you also had the discipline to avoid trading the markets. Forex brokers south africa are doing great job in implementing strategies.
3. Are you making tactical calls?
Sometimes, when markets move in a specific direction, a trader can take advantage of the trend and take a speculative trade to generate profits. But when the market moves in a direction that does not favor the trader’s strategy, such as a decline, they are compelled to close their positions.
On the other hand, a long-term investor has to find a way to either maintain a level or take advantage of the fall. In either case, a long-term investor needs to have the discipline to wait for the market to return to its intrinsic value.
4. Do you have a long-term strategy?
You have to be prepared to stick with your trade throughout its life cycle and ride through all market cycles. This could mean riding through a bear market and letting the markets move higher. It could also mean trading a bear market and staying long in markets that have been beaten down.
You have to have the discipline to stay with the market when it is going down. It may seem tempting to close out your positions to mitigate losses, but you must have the discipline to ride through the bear market. When the markets are rising, you can take profits.
5. Do you know how you use the cash?
As a long-term investor, you must not just manage your cash position but also allocate to other assets that you may wish to buy when your cash positions are low. This way, you ensure that you use up your capital without making any calls on the market.
This may not be the most exciting part of your financial plan, but having the discipline to allow your cash to build up and allocate to other assets, will enhance your long-term returns.
FX trading can be advantageous, but you need to weigh up the risk of the trade to come up with the right strategy for you. If you understand what you are doing, you can stay on the right side of the market.