“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett
A definite increase in financial market volatility has been driven by the continued geopolitical and socio-economic crises. There was an extended period of relativistic calm after the global financial crisis broke in 2009 which ended just before the second half of 2015. Consequently, investors cannot be blamed for being lulled into a false sense of security. After all, it looked as though the global financial crisis was over. However, it was not to be. The newest market volatility is driven by a variety of circumstances, most notably the latest series of geopolitical events, consisting of elections, regional conflicts, as well as government policies that have rattled and continue to rock to markets.
It goes without saying that increased market volatility makes for riskier trading, and it can continue to affect investors’ portfolios for the foreseeable future. Therefore, it is important to consider ways to trade successfully on the world’s financial markets.
Geopolitical, socio-economic events, and market volatility
It must be noted that there are ways to trade successfully on the global financial markets. It is important to consider a successful trading strategy such as day-trading. Furthermore, it is critical to partner with an online trading platform to ensure a successful trading relationship with a broker who understands how to trade successfully in extremely volatile market conditions. It is also important that we understand the ins and outs of the impact that geopolitics, socio-economics, and market volatility has on our ability to plan and execute a successful trading strategy. Therefore, let’s have a look at what these terms mean:
In short, market volatility or instability is when a share price or market index moves up and down within a short space of time. It is a statistical measure of the distribution of gains for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Ergo, the higher the volatility, the riskier the security.
For example, if you are interested in trading in foreign exchange and you are interested in emerging market currencies, you will note that emerging market currencies such as the South African Rand (ZAR) tend to be rather volatile versus the USA dollar (USD). Therefore, you need to buy ZAR when the currency is weak, or the dollar is high. Furthermore, you need to purchase USD when the rand is strong, or the dollar is weak.
In essence, Geopolitics is the study of foreign policy to understand, explain and predict international political behaviour based on geographic variables. For example, a recent geopolitical event that quickly unnerved the world’s financial markets is the U.S. Tomahawk missile attack on Syria. “Dow futures initially plunged over 150 points when news of the strike broke, but they rapidly recovered.”
Even though the natural tendency of oil in unstable geopolitical conditions is to rise, the continued global oversupply of oil is keeping the price down. Additionally, Todd Royal opines that even though the current international environment seems to be the worst since the Cold War, it isn’t a reason to allow oil prices to rise based on geopolitical risk.
According to Wikipedia, the field of socio-economics studies how economic activity is affected and is shaped by social processes. Ergo, “it analyses how societies progress, stagnate, or regress because of their local or regional economy, or the global economy.”
A good example of how the financial markets are affected by global socio-economic issues is Donald Trump’s behaviour and how it impacts the capital markets. So far, the markets have managed to ignore his up and down nature, as well as his international gaffes. Nevertheless, the Wall Street fell on the news that he fired FBI Director James Comey. Moreover, it is a well-known fact that the financial markets influence each other. The logical assumption would be that the European stock markets would be down on the back of the Wall Street drop; however, this event did not bother them. They traded higher.
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