Types of Trading Instruments and Their Distinctive Features
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Why is gold as much a commodity as meat? What burns faster — ruble or oil? Why are the shares of some companies cheaper than the paper on which they are printed? We will discuss these and many other traditional issues below in the review of the main financial instruments of the Forex market and their distinctive features.
Currency Pairs
A currency pair reflects the state of the two economies that both affect the supply and demand of the instrument. The growth of one currency in a pair implies growth against many other currencies too. If USDJPY is growing, then this growth is likely to have spread to other currency pairs with the yen, for example EURJPY.
Naturally, it is not exactly the same, but some regularity can be observed even with the naked eye. This is a good benchmark for analysis that reflects the general sentiment of Forex traders.
The currencies of major markets dependent on large economies often depend on the currencies of their patrons — large trading partners. This allows them to move unidirectionally, and traders — to benefit from almost risk-free trades.
The correlation between EURUSD and CHFUSD pairs is more tangible than in the previous example. But even here, one has to take into account many other factors that affect the rates of these currencies. The Swiss franc is traditionally recognized as a safe haven asset, which limits the range of its price movement. At the same time, the euro often goes high and low due to the large-scale currency manipulations of the European Central Bank.
Fundamental and technical analysis is used to forecast the exchange rate of currency pairs.
Technical analysis works with the history of prices already in place. At the heart of such an analysis lie mathematical algorithms that allow revealing the regularities of the movement of currency pairs.
Fundamental analysis assesses global economic factors affecting the growth of markets: GDP, interest rates, labor market, inflation rates, political events, rumors, news releases, etc.
Trump’s shock presidential win gave points to the dollar
The unexpected victory of Trump in the elections broke several record price levels in just a few days in USD/MYR pair: 4.2500; 4.3000; 4,3500 and immediately 4,400.
Many speculative traders trade only using technical analysis, and long-term investors prefer the fundamental one. But many trading strategies are based on a combination of both methods.
Stock indices
Stock indices are a thermometer of national economies. They can assess the health of economic sectors or markets. There are no clear rules for calculating indices, but there are various traditional approaches that should be taken into account in the analysis.
For example, the American industrial Dow Jones and the Japanese export Nikkei 225 are traditionally calculated on a weighted basis. But such an approach to the calculation is considered obsolete as it implies that the weight of the stock can be a part of a fair proportion to its own unstable price.
A more modern method of calculation takes into account the capitalization of all instruments on the index, which allows not to lose sight of the additional significant factors for certain companies. An example of such an index is the S&P 500, which includes 500 US companies with the largest market capitalization.
S&P 500 dynamics for the last 5 years
Buying the index, you bet on the growth of certain economic sectors (for example, industrial Dow Jones or technological Nasdaq) or corporate potential of large companies as a whole — S&P 500, FTSE 100, Stoxx Europe 600, and others.
Shares
Shares are traditionally bought for long-term investment. In many countries, they have traditionally served as an effective alternative to bank deposits.
Dynamics of the price of Sberbank of Russia share for the last 5 years
In the period of economic stability, companies are growing, thus the value of their shares and dividends is growing. When buying shares of promising companies in promising countries, one can count on multiplying their capital after a certain amount of time.
Quite a significant breakthrough in late 2015 for such a large company as McDonald’s
There are also risks of losses, but the abundance of trading instruments offers the widest potential for expanding the range of assets in your portfolio. It is possible and even advisable to buy shares in different sectors of the economy.
Precious Metals
Precious metals have been considered one of the most popular investment assets for a long time. With the cancellation of the «gold standard» system and the appearance of the Jamaican system of free currency conversion, precious metals such as gold lost their exceptional and undeniable ability to insure financial risks.
Silver has some peculiar features, and its prices are characterized by the highest volatility, even in comparison with currency pairs. In a year, silver can grow as much as 75-80%, which cannot occur in any currency market.
Today precious metals are traded like any other commodity, for example meat or soybeans. But in the period of global geopolitical or financial turmoil, many investors are still inclined to insure themselves via this asset class.
Commodities
Prices for various commodities also depend on many factors: production, consumer activity, economic cycles, supply, competition, as well as political, social and environmental conditions.
The largest share of commodity markets is occupied by agricultural products and primary commodities. Sometimes the price environment for commodities can decisively affect the economies of entire countries:
Another curious correlation — the price of Brent crude oil and the Russian ruble
Commodity prices are usually unstable. And the orientation of the economy to the primary commodity development course very often leads to the so-called Dutch Diseasethat exhausts fixed assets and tightens inflation. And this leads to a decrease in the investment attractiveness of the markets.
General Advice for Traders and Investors
Diversify you risks — get used to working with different assets, and do not focus on one pair, otherwise even the most reliable trading strategy will fail sooner or later.
Think through your hedging strategies — your ways of retreat from unprofitable positions. Analyze markets and economic sectors that support stable growth or reverse correlations with the instruments that you trade.
Optimize the analytical work — trading advisors, calendars, indicators, big data technologies and even stable Internet access are your loyal friends and associates on the way to commercial success. Always keep them on hand and stay tuned. A useful skill is the search for curious correlations between different markets and assets at different time periods, such as, for example, ruble with oil. Did you ever notice anything curious?
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