Making direct investments in financial markets is a rewarding experience; however, it is not without its challenges. During periods of heightened volatility, many investors become driven by emotion over logic, which often leads individuals to stray from their long-term strategy.
With geopolitical threats, economic uncertainty and ongoing inflationary pressures causing stress to portfolios, traders and investors must have the correct tools, knowledge and preparation to mitigate the potential risks of a volatile market environment.
During times of low volatility, it is common for investors to favour directional strategies, i.e., buy and hold blue-chip stocks or employ a ‘long risk’ approach, which aims to benefit from a trend of upward price movements, with little thought given to market corrections.
However, market corrections don’t often come with advance warning. Therefore, a clear understanding of these potential risks, and the subsequent utilisation of available tools and strategies, can help traders reduce the extremes of portfolio volatility in times of uncertainty.
Augmenting trading strategy with technology
It’s common knowledge that trading with your emotions can lead to higher-risk, reactive investment behaviour, with little regard to longer-term outcomes. Even the most seasoned trader can fall prey to their emotions in the heat of a risky trade, during a bad day, or when getting caught up in chasing a bull market.
Being aware of these pitfalls is one thing. Still, to truly protect yourself (from yourself), traders should augment their trading strategy with tech tools such as performance analytics to help protect against human error.
Leveraging this sort of technology can allow traders to assess their trading behaviours and the markets. It can offer them the ability to minimise their downside risks by employing sound money management rules, setting reminders to protect themselves from emotional trades, and tracking metrics on open trades in real-time to stay disciplined.
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For many traders, the current period of high volatility might be their first experience of these types of markets. The faster price movements are often mirrored by faster trading, less time setting up trades and less confidence in open positions. This is often compounded by traders taking higher risks per trade by not adjusting their size to match the increased intra-day volatility.
Tools that track discipline can provide early warning signals that undisciplined trades have started to creep into a trader’s performance. A nudge that this is happening can help a trader recover more quickly and take back control of their discipline. Even the most successful traders have periods of ill-discipline – they know how to recover more quickly.
From monitoring to responding
The technology and tools available to traders can assist with monitoring one’s portfolio, but let’s take it a step further by introducing specific tools that allow traders to respond in the short term.
Available to traders now is a range of platform add-ons or tools that allow them to receive trading signals at the right time. These can be excellent tools for a wide range of potential users. For example, inexperienced traders who may struggle to find a reason to trade can use these tools to get factual, live trading signals at regular intervals (and with different maturities).
A suggested trading strategy and signal rationale accompany the trading signal, including a suggested stop level and a take profit level. The rationale underpinning this is that risk management around any trade is an essential part of learning to trade effectively.
In addition, more experienced traders who are not “time rich” may find these tools help them uncover potential trading opportunities that negate the need for them to conduct extensive research before deciding to place a trade, or indeed a reinforcement of an idea they had been looking at.
While much trading activity is centred around economic data releases and other events, these signalling tools identify and present potential trading opportunities based on the evolving price action in each market.
They are a useful source of trading ideas when the “fundamentals” environment is more subdued. Even the most experienced traders often find that trading statistically-generated signals alongside their existing self-led trading may provide them with a useful risk diversification strategy.
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Whether investors are new or more experienced, one of the main benefits of such tools is that they leave the decision of what, when and how to trade completely with the client – while equipping them with all of the necessary information.
Despite the various economic, geopolitical, and social shocks that we’ve seen over the last 24 months, many global share indices are either at or near all-time highs. High inflation and troubles in Eastern Europe bring either the prospect of higher interest rates or higher uncertainty, neither of which are welcome conditions for a long-term share investor.
By employing a smart trading strategy, augmented by tools and performance analytics, traders can help insulate their portfolios from some of the extreme stresses of market uncertainty and rising volatility.
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