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As the end of the year approaches with significant risks weighing on global economic growth, investors are wondering how to position themselves well to limit risk and maximize their returns. In this article, ActivTrades shares with you 5 trading tips that will allow you to acquire good habits during this difficult trading period.
1. Take into account developments in the macroeconomic environment and growth prospects
In any investment process, it is important to know which phase of the economic cycle and the stock market cycle dominates.
As the general level of economic activity evolves through successive phases of expansion and contraction, it is easy to understand that not all sectors of activity and all asset classes will react in the same way during these different phases.
Defensive shares, such as Danone or Carrefour, will for example be a more relevant choice in the event of an economic downturn. These are generally companies whose growth is not linked to economic cycles and whose products or services are necessary in everyday life such as food, beverages, electricity, waste management or healthcare.
Conversely, cyclical stocks and growth stocks such as Apple, LVMH or Tesla will be more attractive options during periods of economic boom and strong market growth.
Thus, taking into account the macroeconomic environment and the overall growth outlook, you can make better trading decisions and optimize your portfolio allocation according to the economic cycle.
2. Be prepared to deal with sharp market declines and significant price volatility
Investing in stock markets always comes with periods of sharp price drops and potential losses for traders and investors. This is by no means a death. Indeed, losses are an integral part of any trading activity and you have to accept them.
When the macroeconomic environment deteriorates and growth prospects are gloomy, investors are much more sensitive to economic news or statistics regarding e.g. growth, inflation, employment or even monetary policy.
Their emotions often get the better of them, often resulting in impressive price movements. Therefore, you must learn to recognize these moments of high volatility in order to avoid them or take advantage of them.
Also, make sure that you always control your risk level and that your gains are always greater than your losses. In addition, it is important to learn to control your emotions in your trading to prevent them from taking over and negatively affecting your performance in the stock market.
This is why preparing for such configurations (bearish market and high volatility) will allow you to better control the risk weighing on your positions and to be more disciplined.
3. Learn to trade with all price movements
It is not uncommon that trading plans are usually only suitable for one market condition and one trading setup.
While a trading strategy may provide very good results in markets with low volatility or those moving within a range, it may not provide such relevant signals when prices rise or fall sharply.
This is why it is preferable to have a trading strategy that allows you to adapt to many market situations. Even better, it would be preferable to have multiple trading strategies depending on the market configurations that may arise. You will be able to profit from all price movements: strong trend, rising volatility, falling prices, upward acceleration, sideways trading, etc.
Investors tend to always benefit from price increases. Nevertheless, it is important to know that certain financial derivatives can allow you to take advantage of falling prices.
As a reminder, shorting the markets via a derivative consists of borrowing a financial asset from your broker via your trading platform to sell it in the markets and buy it back later at a lower price. You thus return the asset to your stockbroker and, in case of good expectations, keep the difference in value between the opening and closing of your position as profit. Instead of suffering from the price drops, you can take advantage of them. But in case of bad expectation, you will suffer a loss.
4. Diversify your stock market portfolio and optimize your asset allocation
Portfolio diversification is a key concept in the stock market. It allows you to use a strategy to limit your risk by investing in assets that are not positively correlated – that is, not necessarily moving in the same direction.
It is therefore important to invest in a number of different business sectors when investing in shares to best spread your risk. But it is also important to invest in different asset classes such as bonds, commodities, currencies, stock market indices or even cryptocurrencies.
It is also interesting not only to focus on the geographical area you know best, such as France or Europe, but to invest in other parts of the world. You can also invest in currencies other than euros.
Each part of the world actually faces different challenges and growth prospects, allowing you to expose yourself to countries or currencies that do not offer the same return/risk ratio. Furthermore, world events do not affect countries in the same way.
You should also consider different financial products depending on your trading strategy and style (scalping, day trading, swing trading, position trading, arbitrage, hedging, etc.). Among the best known are ETFs, options, warrants, turbos and the many derivative products offered by ActivTrades.
5. Objectively analyze your positions to plan the necessary rebalancing
Now that you know the importance of taking into account the macroeconomic situation as a whole, preparing for periods of volatility in the stock market, knowing how to take advantage of all price movements and diversifying your investments well, you need to do sure that all these criteria are taken into account in the current composition of your portfolio.
To do this, you need to take a step back and be objective about the status of your positions in relation to your profile, but also in relation to your objectives, as well as to the general analyzed situation. This will help you determine the best ways to rebalance your investments.
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