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Getting More Active In The Financial Market? 3 Important Areas To Understand As We Start Trading Different Asset Classes

Has trading replaced traveling because of the pandemic?

Over the past 20 months, the financial markets have become a more active place as more people get interested in investing and trading. Deloitte reported that in the US, about 10 million Americans (about 3% of the US population) opened a new brokerage account in 2020.

In Singapore, a similar trend can be observed. The Singapore Exchange (SGX) achieved its record revenue for FY2020, crossing the $1 billion revenue mark, and recording a total revenue of $1.053 billion and net profit of $472 million. This comes off the back of an increase in investing and trading activities among people in Singapore.

But being active in the financial market isn’t (or shouldn’t be) just deploying more cash in the asset classes we think would do well. In fact, simply trading what’s popular in the financial market is dangerous and can lead to significant losses for traders who are not able to manage their risk well.

Read Also: Main Street Vs Wall Street. A Singapore Fund Manager Shares Why The Stock Markets Are Going On A Bull Run Despite The Recession #TheNewNormal

#1 The Fear Of Missing Out (FOMO) Is NOT A Good Reason To Start Trading

Whether it’s travelling to Iceland to see the Northern Lights, queuing in line to purchase the latest McDonald’s merchandise or giving a blank cheque so that we can secure our choice unit at a newly launched condominium development, the fear of missing out (FOMO) can lead us to spend more than we otherwise would. This same logic applies to the financial market.

One of the topics that were raised during our 3-day virtual event – Welcome To Wall Street, was whether FOMO was making trading an unhealthy habit. For example, in early 2021, we saw the rise of meme stocks like GameStop and AMC that had their prices being pushed up by investors on Reddit.

Just like how popular restaurants, dream vacation destinations and innovative household gadgets can go viral on social media, stocks, NFTs and cryptocurrencies can also go viral these days. On Instagram, YouTube and even TikTok, trading-related content is constantly created with many influencers talking about them daily. Even Elon Musk is using Twitter to ask if he should sell his Tesla stocks, never mind if the result of his poll doesn’t change what he intends to do.

For me personally, having more people getting interested in finance is never a bad thing. Whether it’s through social media or somewhere else, people taking actionable steps to generate returns with their capital by investing and trading is something that we should encourage.

At the same time, however, the financial market is not a place that you want to enter without sufficient knowledge. Just like you wouldn’t attempt a deadlift in the gym without knowing the right technique to use as we risk injuring ourselves, likewise, we shouldn’t be placing trades on financial assets we are unfamiliar with.

#2 Set A Budget For Yourself In The Financial Market

Everyone enjoys clinching a good deal. Whether it’s online shopping on 11.11, a one-for-one happy hour deal or PSG signing Lionel Messi on a free transfer, it’s always a great feeling to know that you bought something at a price that is far lower than what it used to cost, or what you should have been paying for.

In the financial market, I love scoring great deals. This can be in the form of a company that I invested in being taken private at a premium, buying Tesla shares at $100, Bitcoin at $1,000, or DBS shares at $18.

At the same time, regardless of how good a deal could be, it’s not advisable for us to spend beyond our budget. This applies not only to online shopping but also to the financial markets.

When we trade in the financial markets, we should set a “budget” for ourselves. For me, this budget refers to the money we use for investing and trading that we can afford to lose. We should never invest or trade with money that we need for something else important in our lives. Being adequately diversified is also an important concept. No matter how profitable we think a trade could be, we should not be putting all our investable monies into just 1-2 trades.

#3 Emotions Is Not Necessarily Our Friend In The Financial Markets

Our emotions serve us well in many aspects of life. Whether it’s (rightfully) being fearful if a pack of wild boars or dogs approach us, or choosing to run out of a building that is on fire as quickly as possible, it’s good to trust our emotions and instincts in such situations.

In the financial market, however, our emotions are not necessarily our friend. One common trait I find among most experienced traders and investors is just how unemotional they are when it comes to trading and investing in the financial markets. While most of us will be unhappy with losing money, many experienced traders and investors are less affected when they make losing trades.

The reason for this is simple, experienced traders and investors understand that both winning and losing are part and parcel of participating in the financial market. The idea isn’t to avoid losing at all costs. Rather, it’s to ensure that the profits we make in our winning trades outweigh the losses in our losing trades – and of course, to do this consistently.

One method that I advocate to keep emotions out from our trade is to pick up algorithmic trading. Algorithmic trading is the process of using a computer to help identify and execute trading opportunities based on a trading strategy that a human trader has programmed it to.

While it may appear relatively new to many retail traders, algorithmic trading has been around for many years, with many institutional traders using these methods to help them discover and execute trades with high frequency through the use of computers.

Read Also: Algorithmic Trading & Copy Trading: Why These Two Strategies Of Trading Are Getting Popular In Recent Years?

For anyone who is keen to try out algorithmic trading, my suggestion is to start off with a demo account. A demo account allows you to get familiarised with the trading platform and to set up your trading strategies before you put in actual money in your trades. You can open a demo account with IG and practice trading with $200,000 of virtual funds. A demo account also gives you access to exclusive educational content on IG Academy where you can learn more about trading the different types of financial instruments that are available.