The Need To Protect Your Trades In The Current Market Conditions – Introduction
On Monday, Donald Trump had a meeting to discuss the opioid epidemic in the United States. After the meeting, the press got an opportunity to ask him several questions. One of them was on North Korea. As you already know, North Korea presents a threat to global peace through its development of nuclear weapons. Donald Trump’s response was that North Korea would be met with fire and fury. Soon after, North Korea responded, saying that they would attack United States’ territory of Guam. The market reacted angrily. The indices which were touching their all-time highs dropped for two days consecutively.
Sadly, these are the times we are currently living. Periods when no one can accurately state what will happen in the next minute. Therefore, for traders, you need to always protect your trades. Every time you open a trade, it is important that you protect them. There are several ways to achieve this. First, you need to always have a stop loss for all trades you get involved in. A stop loss stops a trade when a certain level is reached. Second, you can hedge the trades you open. One way to hedge is to do what is known as Pairs Trading. In pairs trading, first, you find two currencies or commodities that are perfectly correlated and then buy one and sell another using different volumes. In such a case, you will make money from the spread. Another way to protect your account is to trade in small volumes.
The first reason why you need to protect your trades, especially these days is that we have a United States president who is not convectional. In the past, U.S. presidents were highly convectional. We knew what they were to say before they opened their mouth. This is because their words were well-calculated. Today, this is not the case. Trump is not your ordinary politically correct president. He is a prolific Tweeter who says things no one expects. There are also huge number of leaks in his administration. Therefore, no one really knows what will happen in the next minute. No one knows whether or when he plans to bomb North Korea. This is very relevant because of the power of the United States which is the most powerful country on earth.
Secondly, you should always make protecting your trades a norm. As a trader, no matter what your research tells you, no one can guarantee that your trades will go your way. A good example is what happened recently. Nvidia is one of the best performing stock today. It has gained by more than 50% this year. On Thursday, it released its earnings that beat analyst estimates. Its projections were also good. However, during extended hours, the company’s stock tanked by more than 10%. Apparently, investors were looking at its segment’s performance and its growth. Therefore, investors who had not protected their trades suffered from this.
Third, as I have mentioned before, we are in a low volatility environment. Money moving to passive investments has increased significantly. Apart from the North Korean issue, there is no other geopolitical issue that is affecting market volatility. In fact, the VIX index which measures volatility in the market has been at the lowest level in years. In such periods of low volatility, it is important for you to always be protective of your account. Also, be prepared to take profits, no matter their size.