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A Trade or an Investment? Declare Intentions Before Buying or Selling
Volatile markets can offer long-term investment opportunities when prices rise or fall to irrational levels.
Market volatility creates a paradise of opportunities for nimble traders with their fingers on the pulse of markets. High price variance can cause passive investors without a dynamic approach heartburn as it creates rocky results in portfolios. However, volatile markets can also offer long-term investment opportunities when prices rise or fall to irrational levels.
In March 2020, the global pandemic dramatically changed markets, requiring an adjustment to reflect the impact of COVID-19 on the economy and daily life. In March 2022, the world faces a war in Europe with nuclear power on one side. The war in Ukraine is Russian leader Vladimir Putin’s geopolitical chess move to bring the territory he does not consider a country back under Russia’s control. The US and Europe see it differently, considering Ukraine a sovereign country in Eastern Europe. China’s “no limits” alliance with Russia complicates matters as it pits the world’s leading nuclear powers in a confrontational position with the US and Europe on one side and Russia and China on the other. Sanctions and retaliation are creating economic impacts.
Markets reflect the economic and geopolitical landscapes. In March 2022, Russia’s aggression has caused a dramatic change for traders and investors in markets across all asset classes.
Trade or Investment- Make a declaration and a plan
- A trade is a short-term risk position on an asset’s long or short side.
- An investment can be long or short, but it typically is for the medium to long-term, which requires patience and perseverance.
- Before buying or selling any asset to open a risk position, declare if it is a trade or investment.
- Before execution, write down a plan for the risk position so you can refer back to it during the life of the long or short.
Risk-reward is critical
- In any trade or investment, risk-reward is the crucial factor.
- Even the most successful traders and investors call the market’s direction wrong at least half the time.
- Running profits and stopping losses are critical for success.
- You are always long or short at the current market price, not the execution price.
- Adjust risk-reward to reflect ongoing market conditions.
- Do not allow trading profits to become losses- Greed is your enemy.
- Be humble- admitting you are wrong and taking small losses will enable you to stay in the game.
- Never allow a trade to become an investment because the price moves contrary to expectations.
Leverage and liquidity adjustments are necessary
- Leverage is a function of the market volatility- higher leverage is appropriate in static markets, lower leverage is prudent in volatile markets.
- Liquidity is a factor- The ability to execute trades or investments on tight bid-offer spreads is critical for success.
- Monitor leverage and liquidity and make adjustments as they change with market conditions.
Bull and bear markets can put prices at illogical levels
- Picking tops or bottoms in markets is contrarian as it goes against the current market trend.
- Fear and greed can cause bullish and bearish trends to take prices to illogical, irrational, and unreasonable levels.
- Respect the trend as it reflects the market’s collective sentiment
Caution is necessary as the world has changed
- Markets reflect the economic and geopolitical landscapes.
- The war in Ukraine, sanctions, embargos, retaliatory measures, and other factors can cause sudden market volatility.
- Inflation is at the highest level in over four decades. The war is fuel for the inflationary fire.
- Be cautious and remember, the market price is always the right price.
- Embrace and understand volatility and use it to your advantage.
- Expect the unexpected, and you will never be surprised.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!