The new year has arrived with a bit of a bang for markets: a euro selloff, further slides in the oil price, and the rouble is still getting hammered. And for UK investors, the run-up to the General Election is bound to bring with it several waves of serious uncertainty. Between now and May, says Panmure Gordon’s David Buik, the FTSE could shed up to 10 per cent. But despite that, the UK economy is set fair for 2015, with GDP growth likely to come in at about 2.75 per cent.
So what should traders be considering at the start of what’s set to be a reasonably bumpy but exciting ride? City A.M. asks the experts for their New Year trading resolutions.
STICK WITH THE TREND
If you’re looking to jazz things up in 2015, one technique could be to trade more long term than the average trader, says currency strategy analyst Alejandro Zambrano of DailyFX.com. Many like to trade very short term, with the average trader making three trades a day. While doing this isn’t a problem, provided you are profitable, stepping back and using a daily chart could be helpful, he says. A good example is the latest decline in euro-dollar: “anyone with the patience to keep a position for eight to 14 trading days is now in a position to collect 500 to 660 pips in gains.”
Moreover, remember that strong trends are actually good news for trading, says Kathleen Brooks of FOREX.com – “they could sustain us traders for the foreseeable future.” When markets are moving, it’s easy to jump on board, thinking that otherwise you’ll miss the move, she says. But try to resist temptation: “wait for the market to come to you – it always does. Even though trends feel like they just go in one direction, they don’t – they pull back and you can get in at a better level if you have patience.”
GET A HANDLE ON LEVERAGE
Regardless of the big trends, sizing your position so that you can absorb day-to-day price swings within a specific market is also vital, says City Index’s chief market strategist Joshua Raymond. Many traders come a cropper by not fully getting to grips with how leverage impacts a position in both a positive and negative way. If prices go against you, the loss could be heavy enough to blow your account out far too early, Raymond warns. It’s perfectly normal to suffer a loss, but take some time this new year to make sure you’re “trading realistic position sizes, and cutting losses early when the market has deemed your rationale for getting into a trade as wrong.”
If, for instance, you have £1,000 in a trading account and go long on the FTSE 100 by £10 per point, it’ll only take a 100 point negative price swing for you to lose all of your funds. Raymond points out that, over the past month, the FTSE has had an average daily price swing of around 90 points. That means that two days of negative price moves, and your account funds could have been lost.
FIND THE BALANCE
But picking the right direction in a market is actually only half the battle, says Raymond. An unbalanced approach to risk and reward – when you’re willing to risk more than you’re prepared to bank as a profit on a trade – could mean you lose money on a net basis, even if you maintain a high trade win rate.
A general rule of thumb, he says, is to never have a risk/reward ratio of less than 1:1. He recommends aiming to always have a positive ratio, so your potential gains always outnumber potential losses. “Even if less than 50 per cent of your trades bank you a profit, a positive risk/reward ratio could still mean you’ve made money on a net basis.” If an investor never risks more than they are willing to bank as profit, they’ll find a balance.
Similarly, setting up for a good trading year also means not biting off more than you can chew over the year, says Brooks. No matter how tempting the opportunities, she says, “for me, that means no more than two positions at any given time.”
The new year may also be an ideal time to make some changes to the make-up of your wider portfolio: are you in danger of tripping yourself up with too much exposure in just one or two asset classes?
Investors should always consider FX as an effective way to diversify a portfolio, says FXPro’s Angus Campbell: “FX generally has a low correlation to other asset classes,” he says. What’s more, “when you take leverage out of the equation, the major FX pairs are less volatile in comparison to, for example, individual equities.”
This, he says, can be achieved in a number of ways – from allocating capital to performance-rated FX strategies, to investing in specialist FX funds.
And there’s nothing wrong, when it comes to stock picks, with planning resolutions to start sticking to later in the year, quips Buik. If the EU “hasn’t buried itself,” media and telecom stocks could look very attractive, he says, with the sector generating considerable M&A activity: “mobile, television and broadband combines must be the only way forward,” he says, recommending an eye be kept on Vodafone, BT and Sky. Royal Dutch Shell is another one to watch – “surely it will become indecently cheap and thus irresistible”.
Harriet Green is business features writer at City A.M.