OPENING POSITION

June 2013

The concept of evolution is present in all facets of our lives. Yet how often do we stop to think about it? The world is constantly changing, and as it does so, it affects the activities that are important to our well-being. Think of how much things have changed in the last 20 years. The population has grown, people are interconnected, and communication has become much faster. All these changes affect the financial markets as well. More people are participating in the markets, transactions are much faster, and global markets are more connected.

As independent traders, we need to adapt to the changes taking place in the markets. The markets are already dynamic, and it’s difficult to keep up with the changes from one day to the next. Just look at what happened to the price of gold recently. Two days was all it took for it to make a sharp fall. It’s difficult to pinpoint why such a drastic move occurred. Typically, a sharp fall in gold may suggest that people are taking their money out of gold and putting it into equities. Yet on the same day that gold fell, so did the equity markets. These two markets were thought to be negatively correlated; could they now be positively correlated?

It’s not uncommon to hear people say that the markets are much more connected today than they ever were. The theories of diversifying into different asset classes and not putting all your eggs in one basket may need to be revisited. There are always exceptions, but if you are trying to reap rewards from the markets, these are the types of changes you need to be aware of. At the same time, you also need to be aware that there are times when the markets move due to fake tweets or human error. Such incidents can cause drastic moves in the market, which can hurt you.

As the markets evolve, our trading strategies must also adapt. There are many more players in the market today, and that number will only grow. As that happens, we must acknowledge that price moves will get more severe. You have no way of knowing the cause of these moves until after they happen. In the meantime, your only solution is to practice good risk management. Good trading!

 Jayanthi Gopalakrishnan, Editor

Originally published in the June 2013 issue of Technical Analysis of Stocks & Commodities magazine. All rights reserved. © Copyright 2013, Technical Analysis, Inc.

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