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BUSINESSES SHOULD BE PREPARED FOR SIX DRIVERS OF FX VOLATILITY IN 2018

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BUSINESSES SHOULD BE PREPARED FOR SIX DRIVERS OF FX VOLATILITY IN 2018

Uncertainty in the political and economic landscape was the story of 2017 and this unpredictability doesn’t look set to change for the year ahead. With a number of significant events outlined for 2018 that are highly likely to influence financial markets around the globe, one foreign exchange (FX) company has warned businesses to be prepared for further turbulence during the next 12 months.

Trump coming into power and his actions since, the triggering of Article 50 and subsequent divorce proceedings as the UK exits the European Union (EU), and elections in Europe, all caused substantial volatility in currency markets last year.

Noting the devastating effects currency market instability can have on businesses’ bottom lines, Godi Financial has highlighted six key drivers of FX volatility in 2018. The leading financial firm is warning companies of the need to act now to implement a FX strategy that will safeguard against monetary losses in the face of unpredictable currency markets caused by the following factors:

Ongoing UK Brexit negotiations

Brexit negotiations are the obvious point that could cause much anguish in currency markets. Throughout 2018 there will be plenty of twists and turns as more details become clear on the UK’s exit from the EU. If talks stutter, or indeed come to a standstill, another UK election wouldn’t be out of the realms of possibilities, which could itself have major implications for the UK and Brexit outlook.

Some of the UK’s leading business groups are still calling on Prime Minister Theresa May to agree a Brexit transition deal in a bid to avoid a hard Brexit. Many businesses will turn to contingency plans early this year and prepare for a bleak business outlook if an agreement isn’t reached soon. Recent reports claim the UK government is looking to negotiate a Brexit transitional arrangement but the continuing uncertainty may not only weaken sterling, but damage any optimism amongst British businesses. The Bank of England (BoE) reflects this, noting that a hard Brexit could see the UK lose tens of thousands of jobs, particularly in the financial services sector.

Germany coalition talks

Germany’s Chancellor Angela Merkel is currently in talks with the country’s second largest political party, the Social Democrats (SPD), as she attempts to form a new coalition government and end Germany’s political deadlock. The talks come following the general election three months ago where Merkel’s party was the largest, but without a majority vote.

Immigration has been highlighted as a key obstacle of the talks but Merkel has claimed she is optimistic about the discussions, which are expected to continue until the end of this week.

A new coalition government is unlikely to be formed before the end of the first quarter and if talks break down and a deal is not reached, another election is expected. This uncertainty in the political arena of the largest economy of the euro zone will cause concern in financial markets, with an unstable German government sending ripples through the euro zone.

Italian election

Italy’s next general election is set for no later than spring 2018 and there is concern that a Euro-sceptic government could emerge. Such a result would cause political unrest, which could feed into the financial system and leave poor business sentiment.

The election follows a cycle of votes across Europe, where the general picture has been one of winners that sit on the right of the political scale. Opinion polls have given a nod to this European trend, as well as regional elections in Sicily, where the centre-right were victorious and provided an important measurement of voters’ intentions. However the centre-right is unlikely to gain an outright majority in the general election and so an alliance would need to be formed, which could mean coalition partners from the left. How stable such an outcome would be is questionable.

Whatever the outcome, Italy’s banking woes persist due to non-performing loans and undercapitalisation, so fingers will still point to Italian banking instability, and this can’t be ignored.

North American Free Trade Agreement (NAFTA)

US President Donald Trump is continuing to stand firm on his new and controversial proposals for the North American Free Trade Agreement (NAFTA). Canada and Mexico – two of the US’s major export markets – are making no signs of accepting the proposals, which are said to lead to a rebalanced and modernised agreement.

The Trump administration’s apparent willingness to pull out of NAFTA if serious concessions aren’t made is viewed as a significant blow to the US economy and could even prompt a recession. The cancellation of NAFTA would also mean major damage to automobile companies such as Ford and GM, tech companies like Cisco and Microsoft, as well as agriculture businesses.

Talks currently appear to be making little progress and negotiations will likely drag on through early 2018, creating more uncertainty as to the outcome.

Developments in China

In early December, the State Council Information Office told Reuters that China’s economic growth target for this year will represent new changes in the economy as the government places more prominence on higher quality development. It has been noted that China’s leaders will probably maintain 2017s growth target of approximately 6.5 per cent this year, despite risks associated with its very high amount of debt.

If there is a slide in financial growth, it may cause pain and uncertainty not just for China, but for the global market. That said, it is predicted that any changes shall be gradual, but it’s always worth keeping on the radar.

Global geopolitical tensions

Defence was stepped up during the latter part of 2017 by Nordic countries in reaction to Russia’s increased military activity. As well as the Nordic countries, tensions also exist between Russia and Turkey, Syria and Ukraine, and this will continue to be in focus in 2018. Russian sanctions could be tightened as a result and may well add fuel to the fire.

Strains between North Korea, the US and China could deepen if North Korea continues with its aggressive missile test program, with the risk of a nuclear war being a major concern if it comes to breaking point.

Middle Eastern relations are also still in the spotlight. If the deep rooted tensions between Iran and Saudi Arabia intensified, there could be disruption to energy exports out of the Middle East and oil prices could be impacted. Unease amongst Israel, Lebanon, Syria, Turkey and Iraq could have further implications. These geopolitical risks may hurt financial market sentiment, and could subsequently spark volatility in an array of currency markets.

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Factors That Affect the Direction of the Stock Market

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Factors That Affect the Direction of the Stock Market 1

A stock price represents the value of a particular stock of a particular entity, asset or another financial instrument. It is calculated by calculating the price per share of the stock at a particular price and period in time.

There are various factors that affect the direction of the stock market. These factors include interest rates and inflation rates as well as the state of the economy. If one of these factors is not in the favor of the stock market, then it could bring about a downfall of its value.

The stock prices are also affected by various stock indexes, which provide information on a particular company or industry. It helps to analyze the trends of the stock market and makes better decisions when buying and selling.

However, there are some major factors that can influence the performance of the stock market. One such factor is the state of the economy. The state of the economy refers to how well the economy is doing economically. If there is an economic decline in a particular country, then the state of the economy would be affected and the stock market would also take a hit.

Economic conditions can also affect the performance of the stock markets. For example, if the state of the economy is poor and the population is experiencing unemployment, then the economy will suffer and the stock prices will definitely take a hit.

Political turmoil can also bring about a negative effect on the stock markets because it affects the economic conditions and the way people relate to the government. When there is a lack of confidence in the state of the economy and people tend to sell off their stock at cheaper prices, the stocks of the company would suffer.

Another important factor that influences the direction of the stock market is the change in the global economy. It has been proven that the changes in the global economy are very large and it can affect the direction of the stock market in a major way. For example, during the global recession in 2020, the stock prices of many companies suffered a great deal and so did the profits of the company.

The most important thing that determines the direction of the stock market is the state of the economy and the state of the country in which the stock market is based. It is therefore, very important to invest in the stock market as a company that is in good condition. This is because it will help in ensuring the stability in the economy.

The price of the stock market is also affected by the political stability of the country in which the stock market is based. If there is a rise in the political instability, then the price of the stocks would surely go up. However, when the political stability improves, the prices of the stocks will definitely fall.

The factors that affect the direction of the stock market include the conditions in which the economy is doing. It is therefore, very important to have a good understanding of how the economic conditions in a certain country are progressing. This will help in making better investments.

There are certain countries that are very stable and these countries have a very high demand for the stocks of other countries. This means that people from those countries will invest in stocks of countries that are in good condition, and these investments will yield profits for them.

There are also certain countries that have very bad economic conditions and these countries have a very low demand for the stocks of other countries. These countries are also in need of investments and these investments will yield huge losses for them. Therefore, investing in these countries is not advised because these stocks will yield zero returns.

The stock markets are not stable unless there are good economic conditions prevailing in a country. This means that one has to know the economic condition of the country in order to make investments. Investing in the stock market is the best way to do this because investing will always yield returns, as long as the country in which one is investing is stable.

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How has the online trading landscape changed in 2020?

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How has the online trading landscape changed in 2020? 2

By Dáire Ferguson, CEO, AvaTrade 

This year has been all about change following the outbreak of coronavirus and the subsequent global economic downturn which has impacted nearly every aspect of personal and business life. The online trading world has been no exception to this change as volatility in the financial markets has soared.

Although the global markets have been on a rollercoaster for some time with various geopolitical tensions, the market swings that we have witnessed since March have undoubtedly been unlike anything seen before. While these are indeed challenging times, for the online trading community, the increased volatility has proven tempting for those looking to profit handsomely.

However, with the opportunity to make greater profits also comes the possibility to make a loss, so how has 2020 changed the online trading landscape and how can retail investors stay safe?

Lockdown boost

Interest rates offered by banks and other traditional forms of consumer investments have been uninspiring for some time, but with the current economic frailty, the Bank of England cut interest rates to an all-time low. This has left many people in search of more exciting and rewarding ways to grow their savings which is indeed something online trading can provide.

When the pandemic hit earlier this year, it was widely reported that user numbers for online trading rocketed due to disappointing savings rates but also because the enforced lockdown gave more people the time to learn a new skill and educate themselves on online trading.

Dáire Ferguson

Dáire Ferguson

A volatile market certainly offers great scope for profit and new sources of revenue for those that are savvy enough to put their convictions to the test. However, where people stand the chance to profit greatly from market volatility, there is also the possibility to make a loss, particularly for those that are new to online trading or who are still developing their understanding of the market.

The sharp rise in online trading over lockdown paired with this year’s unpredictable global economy has led to some financial losses, but with a number of risk management tools now available this does not necessarily have to be the case.

Protect your assets

Although not yet widely available across the retail market, risk management tools are slowly becoming more prevalent and being offered by online traders as an extra layer of security for those seeking to trade in riskier climates.

There are a range of options available for traders, but amongst the common tools are “take profit” orders in conjunction with “stop loss” orders. A take profit order is a type of limit order that specifies the exact price for traders to close out an open position for a profit, and if the price of the security does not reach the limit price, the take profit order will not be fulfilled. A stop loss order can limit the trader’s loss on a security position by buying or selling a stock when it reaches a certain price.

Take profit and stop loss orders are good for mitigating risk, but for those that are new to the game or who would prefer extra support, there are even some risk management tools, such as AvaProtect, that provide total protection against loss for a defined period. This means that if the market moves in the wrong direction than originally anticipated, traders can recoup their losses, minus the cost of taking out the protection.

Not a day has gone by this year without the news prompting a change in the financial markets. Until a cure for the coronavirus is discovered, we are unlikely to return to ‘normal’ and the global markets will continue to remain highly volatile. In addition, later this year we will witness one of the most critical US presidential elections in history and the UK’s transition period for Brexit will come to an end. The outcome of these events may well trigger further volatility.

Of course, this may also encourage more people to dip their toes into online trading for a chance to profit. As more people take an interest and sign up to online trading platforms, providers will certainly look to increase or improve the risk management tools on offer to try and keep new users on board, and this could spell a new era for the online trading world.

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Trading Strategies

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Trading Strategies 3

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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