Home Trading How to trade through an economic storm 
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How to trade through an economic storm 

by uma
gawdo

By Marc Despallieres, Chief Strategy & Trading Officer at Vantage Markets 

50 years down the line, if you were to look up 2022 in the annals of economic history, a phrase you would likely see would be high volatility. Economies are fraught with uncertainty and instability, which is spilling into markets and causing significant – often unexpected – twists and turns.

Just when we thought we were coming out the worst of Covid-19, war breaks out in Europe. And for traders in the UK, this has most recently been topped off by a mini-budget from the Government that has unintentionally crashed the FTSE and pound. 

For most, this economic storm is impossible to navigate, and the majority of people have accepted that their wealth is going to take a hit in the aftermath of Covid-19. But, for traders, it’s different. Volatility equals opportunity.

Thunderbolts and lightening, very, very frightening

Volatility has spread far and wide. At the moment, stock market charts resemble lightning strikes, flashing up and down, falling and rising unpredictably, with even precious metals seeing big spreads. While volatility is always welcome, the markets have become increasingly unpredictable, complex and difficult for retail traders to navigate. 

The UK’s recent mini-budget is an example of the subversion of normality. Budgets and similar Government intervention are usually meant to give confidence, but this one only succeeded in increasing market volatility. It caused the pound to crash and the Bank of England to step in with emergency measures. 

Onto economic data, and the inflation rates across the world are skyrocketing. According to data from CitiGroup, inflation in the UK is expected to hit 18% in the new year – a serious problem, creating more market fear, and in turn more volatility. This raises serious questions over interest rates, which seem to be following suit, and with the UK not ruling out emergency interest hikes, investor sentiment is one of worry. There are bracing for further market storms, unable to figure out what their next moves should be. 

Finally, industry factors. In our case this is the energy crisis that we are currently going through. Our dependence on Russian gas has led to the energy prices rising massively, and throwing us deeper into the cost-of-living crisis that we find ourselves in and the wide knock-on effects that come with it, the full extent of which are not immediately apparent. 

However, although the financial outlook seems fairly dismal and storm has clouded the vision of traders, there is light at the end of the tunnel. If traders have the right tools and know where to look, they’ll find the opportunity that volatility always brings with it. 

The right equipment for stormy weather 

A common mistake traders make – especially the more amateur ones – is to withdraw from the market, limiting trading in fear of loss. While a more cautious approach is recommended, this means traders miss the opportunities that come with volatility. There are many ways that the everyday investor can scout out the opportunity in these periods, but it often requires taking a bit of a leap into areas where they haven’t traded before. 

One such popular move is adding short selling to your trading strategy. The everyday investor is able to hedge against an asset class or index such as the FTSE 250, and make a return if the market continues to crash. As the price of the asset falls, retail traders create their own market opportunities, and the further it goes down, the more money that the trader can make. In a similar fashion, CFDs also present opportunities for traders to capitalise on downturns. 

However, it is also important to have a diverse portfolio. Although these tricky periods seem like they could last forever, this is not the case. Bear in mind that they typically last around six months to a year. Stocks regained their value post the 2008 recession, and they will do again this time, eventually. Retail traders must maintain a long-term view and not fall on the wrong side when the markets tick upwards. This means that while you pay attention to short-term opportunities, you also may want to consider blue-chip stocks companies with proven track records as well.

Even though stocks often tend to plummet in times of economic downturn, this doesn’t always match up to performance or value. Take Amazon for example. Amazon’s share price, YTD, has fallen by 32%. However, the company’s name, continued growth, and plans for the future all point towards the fact that there is still plenty of value to be found. During these times of volatility, if traders are able to research and uncover these ‘golden’ stocks, they can get them at a huge discount and create market opportunities further down the line, when we do pull ourselves out of the recession. 

These times of stormy market conditions does not make for an easy ride for retail investors. However, it’s important to remember that this period won’t last forever and by reconsidering their portfolio, hunting value stocks, considering including short selling or CFDs into strategies, day traders can find the opportunities. Conditions are tougher but with each strike of lightning and market move comes an opportunity, and if day traders can be flexible, adaptable and draw on expert help, they can uncover the opportunity rainbow that the volatility storm leaves behind. 

 

www.gawdo.com

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