Increase your chances of success by trading different asset classes

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Different asset
classes respond in different ways to various fundamental developments. For example,
you can have short-term government bonds selling off because the central bank
is tightening monetary policy or an FX pair in an uptrend because the central
bank of the currency that is appreciating is raising interest rates while the
central bank of the currency that is depreciating is cutting rates. You can
also have different equity sectors performing differently depending on the
economic cycle.

When you build your
trading theses you should find a market where your idea can be expressed in the
best possible way giving you good asymmetric bets. This process will also keep you
disciplined as you will only look for the highest conviction trades and refrain
from taking positions just out of boredom. Remember your job is not to trade
but to make money.

For example, let’s
say that you have two central banks beginning to tighten their monetary policy.
You may have the relative FX pair just ranging and not giving you any clear
trade. What you can do though is trading the short-term government bonds as an
increase in interest rates will cause a sell-off in those securities. In this
way you reduce your risk and increase your overall chances of success.

With more
experience you’ll start to notice that when you have a high conviction in your
trade because you clearly see the reasons for taking a position, your
psychological pressure will be much lower compared to the times when you force
trades trying to outsmart the market. As the saying goes “when in doubt, stay
out”.

As you can see,
risk management can also come in the form of asset class selection. Even if you
only trade the FX market, you can still apply this concept by trading only the
pairs where you have lots of odds stacked in your favour by reducing the margin
of error.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

Go to Forexlive

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