How to Day Trade Choppy Markets
In the beginning of April, 2018, we all saw how the market that has been on an upward trend for years can lose its momentum within just a few days.
During the crash the markets, which had been up for more than 7% turned negative, costing investors billions of dollars.
So, as a trader, how do you navigate these (and others) choppy markets?
Here are the five thins you need to watch out for.
→ Choppiness Index: How to trade in trendless markets
Look at the Treasury Yields
Investors are always risk averse. They like investing in the safest assets!
Stocks and other assets are often riskier, because a company can go bankrupt. On the other hand, government bonds are usually safer because, a country has several ways of raising money.
As a result, the yields on the bonds are usually low, especially when people find that the country will have a challenge paying back the debt.
This is what happened almost in March 2018: Treasury yields soared after traders started worrying about the country’s financial position.
As shown below, the yields on a ten year rose to almost 3%, which was the highest level in years. So, always pay attention to what is happening in these markets.
→ Yield Curve: Meaning and What You Need to Know About it
Focus on Trade Wars
The world is safer when there is free and fair trade. Unfortunately, we are not in a place of free trade.
For example, while China can continue to export almost everything to the United States, the vice versa is not true. Foreign companies entering the Chinese market find it so difficult.
To solve the issue of trade imbalances, the U.S under Trump started a trade war by putting in place tariffs on several products like Steel and many other.
At the same time, Trump has promised to either fix the NAFTA agreement or exit the deal all-together. This was very important, because an exit from NAFTA could lead to another trade war in an important region (like Mexico).
→ Why Trump Cannot Win a Trade War With China
Focus on Geopolitics
Geopolitical issues are very important. What happened (and sure, is still happening) in the Middle East and Russia could lead to significant implications to the world order.
Therefore, as a trader, you need to have a good understanding about the policy issues in the Middle East, North America, Russia, and South America.
Always Be Informed
Today, it is very important for traders to be ahead of the flock. The way to go about this is being informed about everything.
There are several ways to do this, but the most important one is to have mobile applications, to give you access to breaking news.
Some of the most important apps that We recommend are: Bloomberg, Reuters, Investing.com, and Yahoo Finance. These apps will give you notifications when new things happen.
Always be hedged
As a trader, it is always very important to be prepared for the worst. One way to do this is to ensure that your account is hedged.
There are several ways of doing this. For example, you can consider pairs trading, where you buy and sell financial assets simultaneously. You can also consider buying hedging instruments like VIX and Gold.