The US stock market faced a brutal trading session on September 13 after the CPI print for August reported an 8.3% increase versus the 8.1% expected by Wall Street.
Key US indices, including S&P 500 (SPX), Nasdaq (IXIC), Dow Jones (DJX), and Russell 2000 (RUT), tumbled 5.16%, 4.32%, 3.94% and 3.91%, respectively, on September 13, as high inflation numbers surprised the markets.
High inflation strengthens the prospects of "big" interest rate hikes by the Federal Reserve, which in turn stokes recession fears, hurting investor sentiments.
Generally, most global central banks follow suit to Fed rate hikes to support their currencies.
The factors mentioned above have contributed significantly to stirring up volatility across global markets, be it forex, commodity markets, equity, ETFs, or indices.
This, in turn, has opened a myriad of opportunities, especially across online CFD trading, wherein a trader can take advantage of both rising and falling markets.
However, trading carries risk, and if specific rules are followed, it helps the trader sail through the ongoing volatility and minimizes losses.
The quote highlights the importance of each one of the 3Ds, that is, Discipline, Diversification, and Determination, while trading.
It takes skill, a longer-term outlook, patience, calmness, and an excellent strategy to make the most of trading opportunities. The 3Ds must be an indispensable part of any trading strategy.
Discipline in trading means having laser focus and patience. Discipline helps a trader to stick to an executable strategy and have the patience to wait till the trade is executed according to the plan.
A disciplined trader would not meaninglessly quit a trade too early, owing to emotions like fear or anxiety.
Also, wasting time on creating a "perfect" trading strategy is not wise, as market conditions keep changing, and one strategy cannot cater to the evolving trends.
Further, abandoning a strategy because it failed to deliver the desired results in one go is not a prudent thought process.
Also, hopping from one strategy to another would result in confusion and frustration. The individual might eventually lose interest in trading and eventually opt out. This is not a trait that a disciplined trader would exhibit.
Having said that, if an existing strategy is reviewed enough and needs revision, a trader must utilize demo accounts for practising new techniques.
In a bid to imbibe discipline, a trader can frame a set of written rules that are meticulously planned and follow them to the core to ensure consistency.
Having a well-drafted set of rules makes it easier to commit to the plan, stop losses and entry and exit levels, and prevent the trader from succumbing to emotions like greed or fear.
Discipline also prevents a trader from getting anxious or second-guessing the trading system, and pre-defined limits, or exit strategies, amid market fluctuations. A disciplined trader trades with conviction, as the orders are governed by research and technical analysis.
"Don't put all your eggs in one basket" is a classic piece of advice used to mean that don't concentrate all resources in one place, or you could lose everything.
The proverb is often considered one of the top mantras in the financial world. Diversification is a common strategy used as a hedge to minimize losses.
A trader can diversify positions across asset classes, industries, and geographies that exhibit negative correlations to reduce risk.
In other words, the idea is to diversify the portfolio such that different assets respond differently to the same market conditions. This way, losses incurred in one asset class can be compensated or hedged by gains in another.
By simply spreading investments across different asset classes, an investor is less likely to have the portfolio wiped out due to a single negative turn of events affecting their remaining positions.
Diversification could help preserve the individual's capital and boost risk-adjusted returns.
It is advised to talk to a trusted investment consultant to learn more about strategies that could help you diversify your investment portfolio.
A diverse portfolio could increase exposure to potential positive market movements, which could help the trader benefit from trends across several markets rather than depending on a single market to move favourably.
However, avoid over-diversifying!
It must be noted that it can be imprudent to open too many trading positions in a short time. Although the possibility of returns could be higher, building a diverse portfolio would require much more research and mindfulness.
A trader looking to diversify must closely watch more news and current market events that could cause the asset classes to move. This may not always be worth the reward, in case a trader does not have much time or is a beginner.
Even the most successful traders have losing streaks, but they are also known for their determination and dedication.
Trading is enriched with experience and patience. The learning curve is simple if the trader is sorted. Traders willing to accept their mistakes and learn lessons from them boost the odds of their success.
Traders often keep a trade journal to note down every order detail. The journal helps them reflect on their actions, identify mistakes, and rectify them. This practice instils determination, a very indispensable trait to have.
Trading determination also involves being a little thick-skinned and not being affected much by losses, considering it a part of the learning lesson. Determined traders tend to focus more on keeping their wins higher than losses.
The key lies in being rational, motivated, and focused even during losing streaks and not allowing setbacks to influence your judgement.
Every new trader must know about ongoing market trends and how the asset classes respond to them.
Determination also comes from upskilling with time and evolving trends to be a better trader. The traders can equip new skills and gain valuable insights by following articles, podcasts, webinars, e-Books, and videos, from trusted sources to make informed decisions.