The financial world has gone through various changes in the past few decades. In the past, trading was a thing only the big ‘boys’ took part in. Only the big investment banks such as JP Morgan, Goldman Sachs and Bank of America were involved in the trading world. The banks made themselves huge conglomerates. Today, any person from any country can comfortably trade in their own houses. Technology has helped people from all over the world take part in the multi-trillion dollar a day business. Folks like me and you all we need is a computer, internet connection and a few dollars to get started. At the same time, it has become easier for people from all around the world to trade multiple assets which was not possible in the past. For instance, it is possible for a young man in Zimbabwe or Chile to own shares of Facebook or Microsoft by doing a number of clicks. As I have written in the past, there are so many strategies one can use to make money as a trader. I have written about hedging, scalping, and value investments among other strategies. In this article, I will write about multi-asset trading and how a trader can capitalize on it to make good profits.
Correlation is an important aspect in multi-asset trading. Correlation is simply a relationship between two assets. For instance, asset A can have a direct correlation with asset B such that when A goes up, B follows suit. Secondly, assets can be inversely correlated where asset A will go up when asset B goes down. Finally, assets can lack any correlation whatsoever. In one this scenario, what asset A does will not influence asset B in any way. A good example of direct correlation exists between gold and the dollar. A long term chart between the two shows that the dollar chart will always go up when the dollar strengthens. Another correlation that is happening this year is between the oil prices and the key global indices. As shown in the chart below, the Dow jones industrial average is following the movements of oil.
As a trader, these correlations are very important. In fact, some traders have made significant amount of money by focusing only on correlations. This is further amplified by the fact that the financial markets today are global and traders are able to follow closely what is happening in all parts of the world.
On a daily basis, the Asian markets are the first to open. As a trader, you should always look at the happenings in the Asian markets before making any trading. This is simply because the happenings in Asia have showed to influence the global financial markets during the day. In the first day of trading this year, the Chinese market fell by 7% triggering the circuit breaker to be initiated. The circuit breaker stopped all the trading during the day. When markets opened in Europe and US, the markets corresponded by going lower. Therefore, a trader who sold short the major averages during the day would have made a lot of money.
Another strategy during those panics is to buy the safe havens. In the financial market, the safe havens are the United States treasuries and gold. Investors pull out the money from the volatile markets to the safe havens.
The oil market is another key opportunity that a trader can use to make money. Basically, there are three main ways to look at oil. One, one can trade oil as a commodity. This is where you trade the key oil benchmarks such as Brent and WTI. Secondly, one can decide to trade the oil companies such as Total, Exxon Mobil, and Chevron. Third, one can trade industries that are directly affected by oil prices such as the air transport industries. Lastly, one can trade the global indices such as NASDAQ and Dow industrials. The oil market opens during the Asian markets. If the oil markets opens lower, there is usually a spiral effect amongst the assets aforementioned. For instance, if the oil prices crashes at the open, it will mean that oil companies such as Chevron will realize reduced profits thus taking the share price lower. At the same time, the benchmark indices will head lower because of the significance role of oil companies in these benchmarks. In addition, when the oil prices are lower, the airline companies will make savings leading to better profits. This will lead to higher share prices.
While this theory has worked in many times, it is important to note that it does not work all the time. This is simply because there are usually many underlying factors that affect the price movements. For instance, if oil prices moves up at the Asian open and then Total reports weak earnings and guidance, chances are that the stock will head lower. Therefore, it is important to learn the fundamentals of the two assets you want to use. Here, you should read the news about the company and check whether the company will report earnings during the day. You should also read about any new influential shareholder who has declared a position in the company.