Different asset classes respond in different ways to various fundamental developments. You can have bonds selling-off because the central bank is tightening monetary policy or you can have an FX pair in an uptrend because the central bank of the currency that is appreciating is raising interest rates, while the central bank of the currency that is depreciating is cutting rates.
You can also have various equity sectors responding in different ways to economic events with cyclical stocks falling during hard times and defensive stocks rising.
When you build your trading idea you should find a market where your idea can be expressed in the best possible way giving you the highest return for the risk taken. This process will also keep you disciplined as you will look only for the highest conviction trades and refrain from taking trades just out of boredom. Remember that your job is not to trade but to make money.
Stanley Druckenmiller once said that one of the reasons for his success was that he was lucky to travel across asset classes. He traded commodities, currencies, bonds and equities and it gave him the discipline to trade only what he had the highest conviction in. If he didn't have a good idea in equities, he was happy to have no equities.
Imagine you have two central banks beginning to tighten their monetary policy and the risk sentiment picture is murky. Given that, you may have the corresponding FX pair just ranging and not giving you any high probability trade.
What you can do though is to trade the country's government bonds as a tighter policy will cause a drop in those securities. In this way you reduce your risk and increase your chances of success.
With more experience you’ll start to notice that when you have high conviction in your trade, because you clearly see the reasons for taking a position, your psychological pressure will be much lower compared to the times when you force trades trying to outsmart the market.
This article was written by Giuseppe Dellamotta at www.forexlive.com. Read More Details
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