Under the current conditions when the world is still under the sway of the contagious disease, all financial markets, including the currency one, experience extreme volatility that can either bring hefty profits or result in dramatic losses. This situation is unique indeed as traders will have to deal with the aftermath of this outbreak for the next 16 to 20 months. According to some estimates, during this period markets will remain under pressure due to the downwardly revised economic indicators for both developed countries and emerging markets. In other words, new approaches to risk management, money management, and risk hedging will be relevant for long, perhaps even forever.
Here are five rules of healthy risk management that can come in handy under the current unhealthy market conditions.
1. There is no Holy Grail
Many newbies and even some mature traders spend quite a lot of time and effort searching for a so-called Holy Grail of all investors - the perfect money-making trading strategy. Some of them become too enthusiastic about reaching this goal, neglecting risks of significant losses that they can incur. However, the real market is not a movie about Indiana Jones, and such enthusiasts always get disappointed when they do not find their Holy Grail. The thing is that no strategy can be guaranteed as 100% profitable even under stable conditions not to mention the period of extreme volatility and unpredictability. A highly efficient strategy that could be created during the market turmoil simply does not exist. There is no chance that somebody could have developed, tested and proved the effectiveness of such a strategy as there is not enough historical data. Three months for the creation of any trading strategy is like three seconds. That is why conservative trading strategies with the medium profitability of around 50% are considered more feasible. At the same time, one should never forget about the money management aspects of any trading strategy.
2. Suppress any urges to go all-in
The order placement should be a well-balanced decision. Those who hesitate are better to think twice before opening any deals, especially large ones. Some experts believe that under the current conditions it is reasonable to enter the market with small lots and increase one’s positions only after their forecast is confirmed.
3. It’s all about stop loss
Undoubtedly, stop loss is an indispensable tool for traders. It is always good to be on the safe side and place a stop loss even when you see that your position is moving in the right direction. When highly volatile, the market is rather unpredictable, so one never knows for sure where the price will go next second. Placing stop losses is a good habit, and traders need to acquire it even after the market turmoil fades away.
4. Stick to the 10% rule
Most experts agree that it is unwise to use more than 10% of the total equity. Such a conservative approach can help traders to control their emotions and stay calm, as keeping a cool head is half the battle.
5. Don’t go looking for peaks
It is useless to look for a peak in a trade. Many market players, even experienced ones, have tried doing it with no success. When a trader sees that the price moves in a favorable direction, he unconsciously starts to look for swing highs where the trend would reverse. At such moments, emotions run high and he cannot stay composed. At a certain point he gives in and closes the deal, but it can turn out that the price continues rising, so the trader can feel frustrated.
And here is one more useful tip: Don’t put all your eggs in one basket
Different countries cope with the consequences of the disease outbreak differently. For example, Greece and Vietnam felt a marginal impact, China has already managed to overcome the crisis, whereas Italy’s economy received a harsh blow, as it may face a contraction of one-third of the GDP by the end of 2020. As for the United States, it can either benefit from this situation or incur dramatic losses. Similarly, the currencies of different countries can behave differently this year when the world is trying to recover. In particular, some analysts anticipate that the safe-haven assets will become more attractive to investors, gold will extend gains, while the EM currencies may take a nosedive amid sluggish demand from the developed countries. As the zero-sum game principle states, when one participant loses, another one wins. So, a good solution would be to invest in more than one or two trading instruments. In case one asset in a pair falls, another one will rise and partially recoup losses. Good old diversification of assets often helps to hedge risks.
Yet another crisis proved that to have the nerves of steel, one has to be made of steel like the bull on Wall Street. So, hold your horses, ladies and gentlemen!