How to trade in uncertain markets
|There are easier and harder times to trade. Sometimes the outlook for an asset is so clear, so straightforward that the timing of your entry does not matter as the direction is clearly headed one way. However, there are other times when the direction of a market is genuinely uncertain. Now the job of a trader is not to make every call right, but instead to find your edge and execute it again and again. So, how can you use an edge if the markets are uncertain? This is one approach to take.
Look for the short-term deviations
Take the current run in equity markets. It looks like a bear market rally, but there is a range of opinions out there. Some analysts see the rally as the start of a new bull run and were adding longer-term positions. Still, others sold all their equity holdings seeing another sharp correction lower to come as US data slows. So, which one is it? Of course, you can have your view, and your view may be right, but here is a good alternative to just taking a ‘guess’. Trade the short-term deviations. If equity markets are surging higher and then an inflation print shows US inflation is higher than the maximum forecast then trade the short-term correction. Higher inflation for longer will mean the Fed will need to keep hiking interest rates which should weigh on stocks.
Look for key levels
Let’s say you wanted to take a view that the latest run in US stocks was a bear market rally. Then if you do so use a major technical level to lean against. Look for an obvious place to define and limit your risk. This way you can know that if stocks push higher past your stop then at least a major level was taken out. You also avoid the scenario where you are stuck in a market going against you. See below for a couple examples of major tech levels to lean against in the S&P500 and FTSE 100.
So, there are two key ways to trade uncertain markets. Trade short-term data deviations and use major technical levels if you want to take a decisive view on medium-term direction.
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