The global financial markets are brimming with possibilities. Every day presents an opportunity to profit off price movements, regardless of the direction of asset prices. Conventional wisdom states that the only way to generate positive returns is when markets are appreciating. When traders and investors broaden their horizons to include things like speculative activity, futures markets, and derivatives markets its an entirely different ballgame. For starters, positive returns can be generated in bullish or bearish markets, provided traders call it correctly. Old-school thinking dictates that an underlying asset needs to appreciate before profits can be seen. We now know different.
Using Technical and Fundamental Analysis to Understand Market Movements
There are 4 broad categories of financial assets available to traders and investors. These include currency pairs (major, minor, and exotic pairs), stocks, indices, and commodities. Within each category is a myriad of possible options for traders to dabble in. Depending on the asset in question, traders can place call options or put options on any number of assets, or mix it up accordingly. Short-term trading options and long-term trading options are available. It is no longer necessary to wait an inordinate amount of time for an asset to appreciate for profits to be generated. Today, CFD trading platforms and other derivative products make it possible for traders to roll over huge volumes of cash by speculating on short-term price movements.
Of course, speculation is an art form that requires an extensive understanding of the financial markets. It is foolhardy to assume that the direction of price movement is like a coin toss. There are macroeconomic variables shaping the financial markets in a big way. For example, an important point of departure is economic data releases. All major financial announcements are highlighted on an economic calendar. These include things like NFP (nonfarm payrolls) data, GDP (gross domestic product), unemployment figures, CPI (consumer price inflation), business and consumer sentiment, interest-rates and other important macroeconomic data releases.
The mix of data includes hard data (quantifiable), and soft data (qualifiable). Sentiment is a soft data indicator. Markets are driven by a mix of both, and this is immediately apparent in the value of the USD, GBP, JPY or EUR respectively. As a trader, it is incumbent upon you to understand how macroeconomic data releases impact upon indices like the NASDAQ composite index, Dow Jones 30, S&P 500 index, CAC40, DAX 30 and the Ibex.
On Friday, 9 June and Monday, 12 June, we saw a risk-off approach being adopted to tech stocks on the NASDAQ. This was not a market correction, but it did present buying opportunities for different stocks, notably bank stocks. Additionally, we have seen the price of Bitcoin rising precipitously towards the $3,000 level, before retreating. More regulatory agencies and high-level CEOs are looking favourably at cryptocurrency now than ever before, and this is fueling its price rise.
Nonlinear Correlations in Asset Classes Lead to Strong Profits
Geopolitical uncertainty is one of the strongest drivers of sentiment. Recently, the UK and Europe languished through some major political headwinds. The UK underwent significant financial trauma after the Brexit referendum on June 23, 2016. This was followed by the June 8 general election which gave Prime Minister May a rude awakening. Markets reacted accordingly, and the GBP depreciated sharply while the FTSE 100 index appreciated. An understanding of financial markets is imperative to forecasting the direction of movement in indices and currencies.
Recently, a Saxon Trade analyst highlighted something remarkable in the UK financial markets: Gold the traditional safe-haven asset during times of geopolitical uncertainty moved surprisingly after the UK general election. Instead of traders buying gold to hedge against uncertain post-election outcomes, they sold gold. The reason for this surprise action is particularly savvy. Investors knew that the GBP would depreciate after the election, meaning that dollar-denominated gold would be worth more in pounds sterling after they sold gold. The gold price moved from 993 per ounce to approximately 1007 per ounce, generating sizable returns for traders with large gold holdings. This type of knowledge is only available once you have a keen understanding of how market components interact with one another.