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THE IMPORTANCE OF EMOTIONAL INTELLIGENCE IN FOREX

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Chris Svorcik

Chris Svorcik is the lead educational strategist for Admiral Markets. With over a decade’s worth of experience in Forex, he has helped thousands of retail traders develop strategies which deliver strong and consistent returns. To celebrate Admiral Markets’ first UK birthday, Chris shares his thoughts on the importance of emotional intelligence in a trader’s first year.

As most traders know, achieving long-term profitability through Forex trading is no easy feat. Within their first year, many novice retail traders struggle to make the kind of returns that they originally intended. In some cases, individuals can even lose money. This is something I have seen many times, and it’s a shame, because this can often lead to individuals becoming overwhelmed with disappointment and giving up on their Forex journey before it has really started.

But I’ve also seen many examples of traders who have achieved amazing results within their first year of being active. I’m here to say that you can be one of those examples too. But there’s one concept that is central to achieving early success: mastering emotional intelligence.

Forex trading requires the correct state of mind

Chris Svorcik

Chris Svorcik

Trading is a mind game and requires an individual to manage their emotions effectively. A professional trader must accept that Forex will take them on an emotional rollercoaster.

There will be times when a trading strategy will seem invincible, returning a rapid rate of pips. In these moments, trader can become over-confident and risk more of their capital. On the other hand, when a trading strategy seems to be falling short, it can become difficult to stick with it and see it through.

So the ability to keep emotions in check is absolutely vital. Novice retail traders need to approach their trades with professionalism, and that can’t happen unless our minds are clear.

Handling emotions can be tricky in the heat of the moment. However, this is a skill that can be practiced. Simply becoming self-aware is a powerful way of improving emotional reactions. Here are some of the most common emotional challenges novice traders are likely to encounter in their early months of activity.

1. Choosing the path of least resistance

Most traders adopt a single trading strategy within their first year. This is sensible, as it gives traders adequate time to master the steps of the strategy. The difficulty comes when traders are faced with the emotion of fear or anxiety.

These emotions are entirely normal when trades don’t turn out as originally anticipated. However, they become very dangerous to a trader when they are left unchecked. It can significantly hamper progress and cause a trader to break the rules of their chosen strategy when faced with pressure.

This is why it’s important to choose a trading strategy that matches your personality type, market outlook and appetite for risk. You could call it choosing the path of least resistance.

Every trading strategy has its plus points and limitations. Before implementing a strategy, traders must ensure that they have the ability to see its steps through, even when those limitations are in play. Abandoning a strategy halfway through is a sure-fire way of losing pips and damaging confidence.

The time to change a trading strategy is when you have stuck with it for a period of time and are faced with hard evidence that suggests some adjustment is needed. This is what the smartest traders do. They stay fully committed to their original plan of attack, before making any rash decisions in the face of self-doubt.

2. Recent history does not dictate the future

Past experiences can also play a pivotal role in influencing the emotions of inexperienced traders. This is sometimes referred to as ‘recency bias’ by Forex traders. Quite simply, it means that a trader has lost perspective on their chosen trading strategy due to their most recent results.

For example, a trader may have lost pips on their most recent trade after experiencing a winning run of four. Despite the strategy delivering a much higher percentage of winning trades than losing ones, the most recent negative experience can cause them to feel self-doubt about their trading performance. Some traders will react to those feelings by altering their strategy unnecessarily.

These instances are classic cases of negative emotions skewing the reality of what is actually happening. It’s not just exclusive to Forex traders too, most professionals will have had moments when one bad moment disproportionately outweighs a number of good ones.

So it’s important for first year traders to remember that history does not dictate the future. Remember, traders who look at their trading performances in batches tend to make better decisions than those who judge strategy on a trade-by-trade basis.

Keep checking in with your mental habits

My last piece of advice to traders embarking upon their first year of trading is to regularly check what mental habits affect their performance. Emotions are a natural phenomenon that can appear out of nowhere, so it can be difficult to stop a particular trail of thought.

But by practicing self-awareness, novice traders can transform the way they think for the better. This will lead to improved decisions when placing trades and increases the chances of success.

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China, New Zealand ink trade deal as Beijing calls for reduced global barriers

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China, New Zealand ink trade deal as Beijing calls for reduced global barriers 1

By Praveen Menon and Gabriel Crossley

WELLINGTON/BEIJING (Reuters) – China and New Zealand signed a deal on Tuesday upgrading a free trade pact to give exports from the Pacific nation greater access to the world’s second-largest economy.

The pact comes as Beijing seeks to establish itself as a strong advocate of multilateralism after a bruising trade war with the United States, at a time when the coronavirus has forced the closure of many international borders.

New Zealand Prime Minister Jacinda Ardern confirmed the signing of the expanded deal.

“China remains one of our most important trade partners…For this to take place during the global economic crisis bought about by COVID-19 makes it particularly important,” she told a news conference.

The pact widens an existing trade deal with China to ensure it remains fit for purpose for another decade, Trade Minister Damien O’Connor said in a statement.

It provides for tariffs to be either removed or cut on many of New Zealand’s mostly commodities-based exports, ranging from dairy to timber and seafood, while compliance costs will also be reduced.

For a factbox on key deal points, please click on the square brackets:

CHINA’S MULTILATERAL PUSH

“The upgrade shows the two sides’ firm determination to support multilateralism and free trade,” Zhao Lijian, a spokesman of China’s foreign ministry, told a news briefing in Beijing on Tuesday.

The previous day, speaking at a virtual meeting of the World Economic Forum, President Xi Jinping had criticised isolationism and “Cold War” thinking and called for barriers to trade, investment and technological exchange to be removed.

In recent months, Beijing has signed an investment pact with the European Union and joined the world’s largest free trade bloc in the 15-country Regional Comprehensive Economic Partnership (RCEP), which includes New Zealand.

China has also expressed interest in joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) Agreement, the successor to a pact from which Washington withdrew.

China’s new deal with Wellington also opens up sectors such as aviation, education and finance. In exchange, New Zealand will increase visa quotas for Chinese language teachers and tour guides, the official Xinhua news agency said.

New Zealand was the first developed nation to sign a free trade pact with China in 2008, and has long been touted by Beijing as an exemplar of Western engagement.

China is now New Zealand’s largest trading partner, with annual two-way trade of more than NZ$32 billion ($21.58 billion).

But ties have been tested under Ardern’s government as New Zealand criticised China’s influence on small Pacific islands and raised human rights concerns about Muslim Uighurs.

Ardern also backed Taiwan’s participation at the World Health Organization (WHO) despite a warning from Beijing.

The wider trade pact also comes as Beijing’s ties with neighbouring Australia worsened after Canberra called for an independent investigation into the origins of the coronavirus pandemic, which was first reported in central China.

Australia has appealed to the World Trade Organization to review China’s decision to impose hefty tariffs on imports of its barley.

New Zealand, which will host the regional Asia Pacific Economic Cooperation summit this year, has said it would be willing to help negotiate a truce between China and Australia.

($1=1.3914 New Zealand dollars)

(Reporting by Praveen Menon; Editing by Aurora Ellis and Sam Holmes)

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Cryptocurrencies: the new gold?

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Cryptocurrencies: the new gold? 2

By Gerald Moser, Chief Market Strategist, Barclays Private Bank

Time to add to a portfolio?

There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.

While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.

Cryptocurrencies: the new gold? 3

Poor diversifier

And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.

Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.

In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.

An inflation hedge?

Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.

Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.

Other considerations

Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.

From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.

Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.

Cryptocurrencies are here to stay

Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.

And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 4

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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