What you have to Consider When Selecting a Financial Asset to Trade? Here the 4 most important
The financial market offers thousands of opportunities to traders and investors. This is because of the number of assets that are available in this market. For example, there are hundreds of currency pairs, tens of commodities, hundreds of indices, hundreds of ETFs, thousands of stocks, and thousands of other derivatives. It is also possible to trade derivatives like the weather.
Therefore, with all these assets, how do you choose the ones to trade?
This is where most traders start to mess up. Instead of trading assets that they are well-aware of, they specialize on assets they know nothing about. It is not uncommon to see a trader who knows a lot about currencies start to open trades on complex derivatives like weather and interest rates swaps.
Instead of doing this, you need to trade on assets that you have a good understanding about. In fact, it is possible for you to make a lot of money by focusing on just one security.
It is very important to consider liquidity when selecting the financial assets you will be trading. Liquidity is created by the demand and supply of a given security. It is important for you to trade on assets that are highly liquid.
For example, a currency pair like EUR/USD is more liquid than a currency pair like USD/TRY. This is because there is very little international trade that involves the dollar and the Turkish Lira. Similarlly, there is a lot of demand for a commodity like crude oil than for lean hogs.
In stocks, there is a lot of demand for stocks like Apple and Facebook than there is for REIT companies like Ventas. The amount of liquidity leads to increased demand. This means that your holdings will always find buyers.
→ How to Analyze and Make Decisions on Crude Oil
The price action of a security is very important. A security whose price is not moving is often not a good one because it will not make you any money. On the other hand, a security whose price is trending is usually the best. A trend can be an upward or downward movement in a security.
When the price is moving upwards, the trader has two choices:
- He can enter the trade and make money when the price moves up. They can also short a security whose price is moving lower.
- He can wait for a reversal.
In finance, there are always reversals. The difficulty in this is to find the exact point where the security will reverse itself. In this, many people have made the mistake of timing the market.
If you are a new trader, you should avoid trading securities which will be affected directly by an economic data. For example, if the Fed is making an interest rates decision today, you should avoid trading any currency pair with the dollar. This is because you don’t have a good understanding about how to trade during volatile markets.
The same is true when a company is expected to release its earnings. On the other hand, if you are an experienced trader, these periods will be very important for you because you will make most of the money in these periods.