You have learned how to use several trading tools and strategies when entering or exiting the market. However, you may be confused about which asset to choose to trade at first. This article will help you find the best trading instrument for you! Let’s begin!
First, we can generally divide all financial assets into two groups: safe and risky. As a rule of thumb, safe-haven assets tend to rise in times of uncertainty and economic instability. In this case, traders usually say something like: “market sentiment is taking risk” or “market is risk-averse.” When this happens, investors are usually looking for the safest place to invest their capital. Therefore, investors prefer safe assets such as precious metals: gold, silver, platinum and trusted currencies: US dollar (USD), Japanese yen (JPY) and Swiss franc (CHF). Why this happen? The precious metal has a long history and traders believe that the asset will maintain its high value in the future. JPY and CHF are considered reliable because of the stable financial position of Japan and Switzerland. The USD is sometimes a safe asset because of the strength of the US economy.
Next, let’s discuss risky assets. They are the Australian dollar, New Zealand dollar, British pound, oil, and stock indexes such as the S&P 500, NASDAQ, and Down Jones. Investors prefer riskier assets when economic indicators in developed countries exceed expectations, major banks and organizations release upbeat forecasts, as well as other good news that lifts everyone’s mood. When such a thing happens, traders and investors want to make money so they are chasing higher returns and, as we know, higher return and risk always go hand in hand, which is why the higher the return the riskier the asset.
Now that we know what currency is, what about indices? Let’s discuss. An index is a basket of individual stocks, often ranked by an independent institution such as a large bank or financial company. The most famous stock index is the S&P 500. It contains 500 large US companies. This index shows the performance of the stock market with the risk and income of these companies. Most traders use it as a benchmark for market sentiment.
Here’s one thing you should keep in mind: to trade the indices mentioned above, you should choose a contract for difference (CFD). For example, to trade the S&P 500 in September, you would need to choose a CFD named S&P 500-20U. Note that this contract expires on September 18th. So, to trade this stock index further starting from September 18th, you should choose another CFD: S&P 500-20Z ending December 12th. So, the first trade can be made on September 8, and the last trade on December 18. You can check the expiration date in MetaTrader by right-clicking the mouse on the CFD in question and selecting ‘Specifications’.
Now, you have basic knowledge of financial assets in Forex. Let’s discuss some market rules that every trader should know.
It is important to know that gold (XAU/USD) is likely to outperform the USD and JPY during a recession. Why? Central banks generally lower interest rates to encourage economic activity during times of downturn. This provides an opportunity for those who borrow money, because they will return less money. At the same time, the decrease in yield is not profitable for those who want to make a deposit, because they will get less money.
In fact, the coronavirus is adding new rules to the market. One of them is that the price of gold begins to move along with the stock price. Analysts give the following explanation: traders try to protect their risky investments in stocks by buying safe gold at the same time. Indeed, the current situation is diverse. On the one hand, there is some uncertainty in the market due to Covid-19. On the other hand, hopes for a vaccine and positive economic news boost market sentiment. In addition, the market is unpredictable and unstable at the moment. Therefore, investors have adapted to the new environment and unwittingly changed the rules. As a result, gold tends to move in the direction of the stock market, especially the S&P 500 we discussed earlier. Remember that the market is easy to change.
You should always keep abreast of major economic releases, central bank and government announcements, and other market events. Why? They tend to move prices. For example, if UK GDP is released better than forecast, the pound (GBP) will rise. If not, then GBP will go down. Please note that this works in general in most cases, but doesn’t always work. Sometimes, the market reaction is quite moderate. So here’s another tip: find the overall market movement and go with the flow!
What’s interesting is that some assets are highly correlated because of their economy or location, for example, AUD and NZD when traded against USD or EUR. In addition, it is important to understand the economic background of a country. The best example is the Canadian dollar. The CAD is very sensitive to oil prices. The CAD and oil prices usually move in the same direction as Canada is one of the largest oil producers in the world. As another example, the economies of China and Canada are very closely connected due to the active trade relations between the two countries. Therefore, the release of the Chinese economy has a big impact not only on the Chinese yuan, but also on the Australian dollar.
The world of Forex is huge and diverse. It is very interesting to explore and analyze it. If you understand how everything is interconnected in Forex, it will give you more confidence when trading!