The Knock-On Effect: Trading Successfully Under Challenging Conditions

“In investing, what is comfortable is rarely profitable.” – Robert Arnott

Have you noticed that the global financial markets seem to have an impact on each other? Our interconnected, global world has ensured and continues to make sure that incidents that occur on the one side of the world will have an impact on the respective financial markets across all four corners of the world.


Geopolitical and socio-economic events affect the markets

There are many examples of this phenomenon occurring around the world on a daily basis. Possibly some of the biggest events that have impacted the global financial markets in the last twelve months were the outcome of the Brexit vote as well as the fact that Donald Trump was voted in as the forty-fifth president of the United States of America. This is not to say that smaller geopolitical events do not impact the markets. They do. It’s just that these two events have been the most prominent (in my mind) over the last twelve months.

One of the latest events that will have an impact on the global financial markets is the fact that Turkey’s president was given sweeping new powers via referendum held last Monday, 17 April 2017. For the sake of clarity, this control includes the scrapping of the Turkish parliamentary system of government in favour of a single, authoritarian leader. While it is well-known that a single ruler with wide-sweeping powers is never a good idea when it comes to the running of any country, the Turkish people’s overriding emotion seems to be that they are tired of coalition governments. They want one firm leader with plenty of authority.


Inter-market relationships

By now, it should be fairly obvious that the different global markets take their lead from one another. For example, the Tokyo stock exchange is the first market open in any given period. Thus, it is the first market to react to what happened in the world overnight. As the other markets open, they will take direction from the Tokyo market, each other, and the world events that take place during the day. Therefore, we can see that there is a form of a knock-on effect in the way that the markets interact with each other.

Furthermore, there are four sub-markets or categories (if you like) that fall within each primary market. These four categories are commodities, bonds, stocks, and currencies and they all interact with each other. According to Investopedia, “the market is a big, confusing beast. With multiple indexes, stock types and categories, it can be overwhelming for the eager investor. But by understanding how the different markets interact with each other, the bigger picture can become much clearer.”


Trading in spite of the current global conditions

There is no doubt that the current geopolitical and socio-economic volatility and instability are making it tough for today’s financial market investors. However, the good news is that there is always hope. It is possible to invest successfully on any number of the world’s financial markets. In essence, all you need to do is to tread cautiously and circumspectly.

In order to trade carefully, the Investopedia article referenced above, goes on to state that by “observing the relationship between commodities, bond prices, stocks and currencies can also lead to smarter trades.” Ergo, the most important thing that any trader can do is to watch the markets and how they interact with each other very carefully. In order to ensure that you are aware what is going on in the markets at all times, here are a couple of tips to help you keep track of what is going on in the financial marketplace:


Arm yourself with knowledge

In other words, educate yourself. I believe that it is not possible to know enough. Therefore, study the price movements of the underlying asset you wish to invest in, read up as much as you can about the company so that you understand management’s ethos and the way they do business, and finally, make sure that you know what is going on in the world around you.


Employ a suitable trading strategy

Again, in my opinion, it is better to work with a short-term trading strategy. You don’t want to leave open trades overnight because you do not know how the markets are going to react to whatever will happen overnight. I believe that it is a good idea to take a medium- to a long-term position when the markets are stable, and they do not fluctuate much within a 24-hour period.


Final thoughts

Times of market volatility and instability are not necessarily negatives with big red flags attached to them. Ergo, it is possible to trade successfully and grow your investment portfolio. However, you need to be cautious and ensure that you have an intimate understanding of the market conditions of the day before you place any trades.

Leave a comment

Your email address will not be published.