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Trade wars and volatility – Can cryptocurrency become a ‘safe-haven’ currency?

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Trade wars and volatility – Can cryptocurrency become a ‘safe-haven’ currency?

David Mercer, CEO of LMAX Exchange Group, which operates LMAX Digital, comments on the effects of the current trade war, currency volatility and how cryptocurrency could emerge as a ‘safe-haven’ currency.

As trade wars continue to gain momentum, creating more volatility in capital and currency markets, many are looking for alternative options to ensure they can maintain the value of their investments. During these times, people tend to go to the so-called ‘safe-havens’.

In the past, ‘safe-haven’ status has been attributed to gold, considered as an archaic standard with no intrinsic value by many.  Although still at a nascent stage, people and institutions are starting to view cryptocurrencies as a store of value.

One of the benefits of cryptocurrency is that it has a limited supply, which protects the intrinsic value of the currency. This characteristic means that cryptocurrency has the potential to emerge as a new safe-haven asset. However, legislative, regulatory and liquidity issues need to be addressed before crypto achieves widespread adoption among both, retail and institutional markets.

Strategic trade wars

The world’s largest economies, US and China, have locked horns, igniting what is showing signs of escalating into a full-blown trade war. Fear of the broader ramifications of these tensions have been widely reported with real and detrimental impact predicted for global economies and investors.

In order to understand the effects of the current trade war that has stricken the global economy, it is important to first understand why governments impose trade tariffs.

The US is at the forefront of the trade tariff dilemma. The main strategy behind imposing these tariffs is to enact a ‘weak dollar policy’. This is a well-trodden path during times of economic distress and financial crisis, which sees governments attempt to bring down the value of domestic currency to make exports cheaper, while imposing tariffs on imports to rebalance the economy.

Dating back to the 2008 crisis, the US Federal Reserve has consistently intervened, artificially boosting the economy, with no exit plan.The idea was to further balance out the US deficit by creating a barrier to foreign imports. The US has a vast trade deficit as it is a massive consumer-driven economy and sources many products desired by consumers from abroad.

In theory, the introduction of trade tariffs, coupled with dovish monetary policies, such as lower interest rates,should temporarily boost the economy. If the currency weakens, the US economy can strengthen.

The race for the weakest currency causes detrimental effects

The problem with this strategy is that what was meant to be a temporary boost while the economy recovered, is still ongoing. The Fed has recklessly incentivised a one-way trade into the stock market for over a decade.

What is left is an inflated stock market falsely promising hope for citizens.Average disposable income is increasing due to longer working hours and rising employment levels, whilst real wages themselves have not gone up and housing prices continue to increase. This is causing consumers to lose trust in the central government intervention policies.

Investors have come to expect record stock market highs in the US, leaving them over-exposed when news of a negative downside risk shock occurs. This increases the potential for radical market movements.

When stabilising the economy, the US has driven many global powers into a race to weaken their respective currencies – no one wants to have currency appreciation.  The European Central Bank is lashing out at the US President for threatening sanctions because they want to avoid an appreciation of the Euro; the Bank of Japan and the Swiss National Bank are following suit to avoid an appreciation of the Japanese Yen and the Swiss Franc.

The US set the wheels in motion and now all the competitive central banks are pumping money into their respective economies, in the race not to be left with the most expensive currency. Now the trade war looks to be escalating, deflationary pressures are resulting in unprecedented currency volatility and risk.

The search for a ‘safe-haven’

With all this uncertainty in the market, more common in emerging economies but less so in developed markets, people are feeling the pressure and becoming worried about the lack of protection for the value of their savings. Investors are wary that the consistent equity market highs will plateau, while consumers are conscious that this economic prosperity isn’t trickling down into their pockets.

The search for a ‘safe-haven’ currency has begun. Historically, gold was always viewed as the stable currency because there is only a limited amount of it in the world and central governments cannot simply print new gold.

Cryptocurrency has been built on the same principle and may provide a more legitimate option. As gold, only a limited number of coins are available for trade. However, by using blockchain technology cryptocurrencyadds another layer of protection that allows for a detailed trail of all trading history. So why aren’t investors and consumers rushing to digital currencies in times like this?

In order to understand this, it’s important to take a step out of the West and into the East, where consumers have been crippled by continuous volatility and have adopted cryptocurrency as a ‘safe-haven’ for their hard-earned money for years.

Dating back to when cryptocurrency first entered the market in 2009, many migrant workers were reliant on sending the profits of their labour back to family members. For example, these workers would make the equivalent of £3 an hour and deposit the money into their bank.

At the end of the week, when they went to send the money home to their families, they would discover that their money was worth next to nothing as the exchange rate had dipped massively. By this point they stopped trusting governments to tell them how much their money was worth and sought different options. Cryptocurrency became the obvious means to pass on their savings to family members.

With a limited amount of coins protecting the value of their money, these migrant workers could take comfort in getting paid in cryptocurrency and knowing that the government could not strip them of its worth.

Fast forward to modern day and cryptocurrency is now accepted widely in most Asian countries. So why is the use of digital currencies in the West not widely spread? And why would anyone choose to get paid in a currency that is ultimately controlled by a governing body and can change at any instance?

What needs to change?

Western societies are now becoming accustomed to currency volatility and are finding themselves in a similar predicament to the migrant workers touched on earlier. The idea that there is a currency that is uncorrelated to government intervention seems comforting, yet the mentality of western cultures still deems this as unsafe due to lack of regulation.

One of the major reasons why the transition into digital currencies hasn’t happened quite as quickly in the West is the number of barriers blocking crypto from being readily accepted.

In order to overcome these barriers, cryptocurrency has to become crystallised as an asset class and institutions will need to begin investing a portion of their portfolio in cryptocurrency as well as actively trading it on crypto exchanges.

For this process to take place, an established internationally trusted marketplace needs to be in place to enable institutional cryptocurrency trading. This hinges on the provision of credit by the banking system, which is at odds with the inspiration behind the Satoshi Nakamoto whitepaper, the paper that was the precursor to Bitcoin. Credit plays an important role in providing traditional fund managers or hedge funds with the funds to execute their trading strategies.

At the moment, credit – the oil that greases the wheels of institutional finance -is grossly absent in cryptocurrencies.

The next step is the implementation of proper regulation,to both, protect the retail consumers and to get institutions comfortable to operate in this marketplace.Once consumers and their coins are protected, institutional players can self-regulate the market. It will be essential for institutions to trade digital currency according to international norms.

Another barrier is the lack of liquidity. But this problem is easier to solve as institutions can resolve this issue by bringing in capital and helping create a more fluid market.

Lastly, the lack of infrastructure needed for sourcing cryptocurrency is another barrier. As they stand, digital currencies are massively expensive to produce due to their energy consumption and because there is no way to efficiently mine units. As more players try to enter the industry, the funding will come, enabling proper, more efficient infrastructure to be built.

The time is now

The world is frustrated with government and central bank intervention and is thirsty for another way in which they can hold and maintain the value of their assets. People need a way to protect the value of their money, regardless of the level of central bank manipulation and intervention.

Cryptocurrency has the framework and ideology to emerge as a ‘safe-haven’ currency in such volatile times, but there are large roadblocks in the way. If some of these barriers can be resolved to encourage institutional investment in digital assets, the world benefit from an alternative asset in which to park their money, or a ‘safe-haven’.

By David Mercer, CEO of LMAX Exchange Group, which operates multiple institutional exchanges for FX and crypto currency trading. LMAX Digital is the Group’s cryptocurrency exchange that focuses on institutional investors only.

Trading

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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