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Lessons from the Pros

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A Class Act

Thu, Aug 21 2008, 05:46 GMT
by Online Trading Academy Team

Online Trading Academy

In yet another appearance on CNBC Asia, I was asked if there were any opportunities left in the markets for investors and traders in this bearish equities market. I answered with a resounding YES! There are plenty of options for profit and also for protection of your investment portfolio. You just have to know where to look.

In the financial markets, there are five asset classes that we can invest in or trade:

1. Cash or cash equivalents such as short term T-Bills and CD's.

2. Fixed Income products such as Treasury Notes and Bonds or Corporate Bonds

3. Equities and ETFs (commonly known as Stocks)

4. Commodities (Gold, Oil, Copper, Lumber, Soybeans, etc.)

5. Currencies (US Dollar, Euro, Pound Sterling, Yen, etc.)

By understanding the relationships between these asset classes and their cycles in relation to the broad economy, you can find profitable opportunities in nearly any market environment. For instance, the US Economy has recently fallen dramatically from its highs of last October. Investors were panicking during the beginnings of the bear market. I saw opportunity. Those savvy traders and investors who understood the inter-market relationships between the asset classes found great deals by buying bonds and commodities. Look at the chart below and see some of the associations between the asset classes.

In the chart, we see the equities market represented by the S&P 500 shown by the red line. The blue line shows commodity prices reflected by the CRB Index. Notice how the commodities and equities have an inverse relationship. When we see a peak in one class, a rally usually forms in the other. Knowing these key relationships can allow you to identify when a market is ready to turn and therefore allows you to shift funds to the asset class that will make you profits. We also see that bond prices tend to move with commodities, (the bond yields will move with equities). The US Dollar will move with equities and therefore the opposite of commodities. It doesn't matter if you are a trader of Forex, Equities, Options, or Futures, these relationships affect you!

This knowledge can give you the edge to spot major shifts in the markets. Identifying the danger and understanding the environment you are trading or investing in is a key portion of risk management and can be as important if not more important than simply setting stops. There are key relationships between all of the asset classes and ways to identify the rotation. If you are not familiar with them, I suggest you visit your local Online Trading Academy and enroll in the next Active Investor and Broad Market Analysis course. Even if you are a short term trader, these courses will enlighten you to the macro economic forces that move the markets. Understanding these forces is an essential skill to profit from trading them.

Until next time, may your trades be green and your losses small!

Published on  Thu, Aug 21 2008, 05:49 GMT