2016 is turning to be a very ‘interesting’ year for the financial markets. For long term bull investors, the calendar year is turning out to be its worst nightmares. All major benchmarks in the United States have lost significantly. The Dow Industrials index has lost more than 5% this year. The NASDAQ has also lost more than 5% while the S&P 500 has lost more than 4%. These numbers are massive especially to anyone involved in the financial market. In Asia, the rout in the financial market has been massive. In China, the circuit breaker as activated two times before the Chinese authorities decided to do away with it. The circuit breaker automatically suspended trading if any induces fell by 7%. In Japan, the Nickel has also lost more than 8%. In Europe, all the major indices have also fallen by as much as 10%. These losses couple to the fact that most of these markets actually suffered losses in 2015.
As a result, most long term Bulls have suffered massive losses. Bloomberg recently put the number at more than $600 billion. Billionaire investor Bill Ackman has continued making losses in his fund which has lost more than 11.5% this year. David Einhorn too has suffered a similar fate. The same case has happened for most major hedge fund managers and mutual funds. In this article, I will explain a number of strategies traders can use to benefit from these market conditions.
Reasons for the rout
The current market conditions have been facilitated by a number of reasons. One, China is seen as the lead reason why world markers have fallen to the bear territory. As the second largest economy in the world, the Chinese market is very important in terms of production and consumption. China is the leading producer and consumer of all the world’s commodities. Therefore, a slow down on the economy has significant impacts. The second main factor is oil. This year alone, the global oil prices gave fallen by more than 10%. Crude oil is trading at the lowest levels in 13 years. This has therefore impacted the oil producing countries. Last but not least, the fed decision to hike interest rates has contributed to the uncertainty in the financial markets.
While these underlying issues have led to major losses in the financial markets, the fact is that wise day traders have not suffered these losses. This is because day traders have an opportunity to trade in either directions. They are also in a good position to open and close trades within a very short duration. This is a key advantage to bring a trader than to investing for the long term (value investing).
Using the Asian markets
As a day trader, you can trade various instruments. These instruments include: commodities, stocks, currencies, and indices. Global financial markets on the other hand open during different times of the day with the Asian markets being the first to open. These markers are very correlated such that what happens in Asian markets usually has spillover effects to the American and European markets. For instance, if the Asian markets fall, American and European markets will also fall. Therefore, a day trader can easily shirt the Dow, S&P or the NASDAQ. Also, a day trader can easily buy gold or treasuries with the expectations that the two will rise. It would be wise to work out a correlation study to establish which asset classes have these correlations and allocate capital accordingly.
For intra day traders, technical analysis is very important. Luckily, there are hundreds of technical indicators that can help you enter and exit trades. The benefit of using technical analysis is that it helps you identify positions to enter and exit trades. Even in a bear market, there will always be opportunity open buy positions. The vice versa is also true. The best technical indicators I recommend you to use are: moving averages (exponential averages in particular), parabolic SAR, relative strength index, and stochastic. There are however more indicators that a trader can use to determine when to enter and leave positions.