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Effective Ways to Trade the Financial Markets

Posted by : Premraj | Posted on : Tuesday, June 6, 2017

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Many people want to know what trades are likely to pay dividends. The financial markets are rather tricky to navigate, given the volatility of bourses, currencies, and commodities. With a Fed rate hike looming, some important financial data can be gleaned.

1. What should I do if the Fed is going to increase interest rates?

Answer: The Fed’s decision on the federal funds rate (FFR) is dependent on the majority consensus of its 12 FOMC members. Among others, the Federal Open Market Committee will evaluate the performance of the US economy and determine whether an interest rate hike is the right decision. If the Fed increases the interest rate, this will invariably impact the cost of credit, the value of the USD, and dollar-denominated commodities such as gold and crude oil. For traders who anticipate an increase in the FFR, it may be a good idea to wait to purchase dollar-denominated assets and foreign currencies. The reason? You will get more bang for your buck that way. Be advised that increasing interest rates are typically priced into equities markets well ahead of time. The big jump that many novice traders expect hardly ever happens on the day of the announcement.

2. How important are economic indicators for trading activity?

Answer: Alex P. Young, a leading binary options strategist says, ‘Most of your trading decisions are going to be based on economic indicators… that’s how you determine the pulse of the market.’ For example, one of the most anticipated economic indicators of all – the nonfarm payrolls data – measures the number of new jobs that have been added to the US economy in a month. If the actual NFP data exceeds expectations (forecasts), the net effect is positive for the Dow Jones, the NASDAQ, and the S&P 500 index. It also acts as a positive for the USD. Much the same is true of GDP data (preliminary vs actual), CPI and PPI data. Econometrics evaluates the impact of these economic indicators on the overall economy; the symbiotic relationship has the capacity to increase or decrease trading activity accordingly. If GDP, NFP, PMI and other data fall short of expectations, traders adopt a bearish attitude to the markets. This results in selloffs, pullbacks, and reversals.

3. Should you trade at an institutional broker or elsewhere?

Answer: Over the years, people have begun migrating en masse from institutional trading activity at bricks and mortar brokerages to other brokers. The catalyst for this paradigm shift was the 2008 global financial crisis. Trillions of dollars were erased from the global economy and people lost faith in the ability of central banks to stabilize their respective countries. As such, an alternative form of trading activity sprouted.

It came in the form of CFD brokerages, social trading platforms, and other contrarian investment vehicles. These options provide more latitude to traders who would otherwise be locked into expensive transactions with institutional brokers. With derivatives trading, clients are not required to purchase and hold the underlying asset – it is simply a speculative trade which gauges the future price direction of the asset in question. Many new investors have embraced these options as part of a broader and more balanced financial portfolio.

4. Should you avoid selling on a correction?

Traders tend to get jittery when market corrections take place. Whenever a ‘seismic activity’ takes place, stocks may get corrected. When this happens, traders fear the worst and start selling in a panic. It should always be remembered that corrections are part of the stock market cycle. There are many troughs and peaks from day-to-day, week to week, and month to month. This is nothing to be concerned about.

According to Deutsche Bank, there is a correction every 357 days. In the US, the last major correction took place quite some time ago, and this is particularly concerning to traders. While corrections cannot be stopped, they should not be feared either. Selling on a market correction is foolhardy given that traders typically buy into a stock after a correction. Besides, these corrections do not last long at all – from several weeks to 2 financial quarters.

These tips will certainly guide you in your journey to greater success in the financial markets. Market insights, financial resources, and self-discipline are the keys to making smarter trading decisions.

 

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