We might be going through the biggest economic crisis in over a decade caused by the pandemic that occupied almost every facet of our lives since the beginning of the year, but that does not preclude the need for a summer break. Traders and investors, too, are taking some time off the markets in order to recharge and prepare themselves for what seems would be very volatile and indeed tumultuous autumn ahead.
Right now, the markets seem quiet due to the overall marginal trading activity that is typical for the summer months. The low levels of liquidity are making most assets range-trading complemented by sporadic volatility outbursts and otherwise random fluctuations. While these conditions are not ideal for making profits by trading, even though this is still possible, the time seems right for traders to reflect on their past performance and prepare for the turbulent months ahead, as a second epidemic wave seems more probable with each passing day.
That is why, in today's article, we strive to present you with the top five things you can do right now to take advantage of the summer period and improve your overall trading performance.
1. Review Your Past Performance. There is a well-known trading adage that goes like: "Proper preparation prevents poor performance", which is also known as the 5P's of success. The subdued trading activity on the markets at present provides traders with a unique opportunity to take some time and review their past performances in order to improve on their strategies.
You can take advantage of this by analysing the entry and exit levels of your trades. Study whether you are using stop-loss orders that are too deep, which would weigh down on your risk/reward ratio; or if your take-profit levels are too close to your entries, which could increase the opportunity cost that you face in the form of missed profits from early exits.
The key to sound reflection on your past trading performance lies in examining in hindsight the market conditions that compelled you to place any given order, as well as the way in which the market developed afterwards. To do so, you would need to review the statistics in your trading journal and determine how frequently you were right in your estimations of the market. Consequently, you would be able to tune in the parameters of your trading strategy and thereby make it more effective.
2. Prepare Yourself Mentally for Turbulent Times Ahead. As was mentioned above, the possibility of a second pandemic wave in the following months entails the probability for new market crashes and volatile trading conditions. If the economic turmoil from the first quarter of the year can be perceived as a precursor of what is yet to come, then traders need to prepare themselves for the stress that stems from plummeting prices and market crashes.
You need to be mentally fit to deal with uncanny trading conditions, under which the regular entry and exit characteristics of your strategy might not function properly. You need to be ready to face sudden changes in the direction of the market, coupled with erratic fluctuations.
There is mounting evidence signalling the likelihood of a protracted and uneven W-shaped recovery, which confirms the anticipations for a new economic downturn. Under these conditions, traders need to brace for surging safe-havens as well as falling yields of government treasuries and other low-risk securities.
3. Learn to Hedge Your Risk. Most retail traders have a very basic approach to trading, in that they look for an asset whose price action fits the criteria of their strategies, and then they place orders on that asset. While there is nothing inherently wrong with this technique under 'normal' market conditions, a more intricate approach might be needed for the turbulent sentiment that is expected to hit the markets in the following months.
While hedging is commonly regarded as a tool for investors, traders can find inspiration from the desire to limit one's exposure, and thereby negate the overall risk. For instance, complex instruments such as some put and call options present the trader with the opportunity to cap his or her maximum loss from any given trade, while still allowing for unlimited profits.
You can consider 'spicing up' your strategy with such intricate approaches to trading, which would allow you to navigate any hidden dangers that could emanate from the newly rising crisis.
4. Brush Up Your Macroeconomics Knowledge. The way governments and central banks manage a financial crisis is through fiscal and monetary policies, respectively. You would do well to read about the two, as a second economic downturn in the third quarter is bound to prompt governments and central banks to action once again.
As a general guideline, governments typically stir their fiscal policies in one of two ways (fiscal policy is, however, not limited solely to these two approaches). They can either adjust the tax rates or increase/decrease the level of government spending. Meanwhile, central banks can change the underlying interest rate and engage in purchasing government treasuries.
Make sure you understand the rationale behind the two, so you are not caught completely off guard when governments and central banks start responding to the rapidly changing financial conditions, which will undoubtedly affect the capital markets. You can find more information concerning the two policies in our trading book here.
5. Take a Break! The final advice is frequently neglected because it is so obvious that it barely requires any explanation. Nevertheless, traders should not forget that trading, similarly to any other activity, can be tiring and strenuous. You need to take some time off the market and relax, because, as was mentioned earlier, it looks like a new economic downturn is just around the corner.