Trading the fear factor

Trading the fear factor

Most of the misfortunes we worry about never materialize. In fact, 85% of peoples’ fears never happen, according to psychologist Dr. Robert Leahy. The knowledge that most worries never happen can be a strategy in the world of finance that most newbies overlook.

Fear amongst investors is a reason why asset prices fall, but if we know that 85% of the time those fears are unfounded, we also know the corresponding price fall is likely to be limited. This insight can actually provide a trading opportunity that can put you way ahead of the curve. Selling an asset at the very beginning of crash makes the highest profits, but just how can a trader get that early warning.

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Technical analysis an help

Trading the fear factor is a strategy in which we essentially 'buy fear’. This strategy is unique because no A.I. or algorithm can factor in human emotion or the herd mentality. One problem is timing. Very often markets will continue dropping for some time after fear sets in. At what point do you buy fear? Leap in too soon and you may have to weather a big drawdown. That’s fine if you have deep pockets like Warren Buffet, but for the rest of us, it can spell disaster.

One possible solution is to use technical analysis to help time the turn. Whilst there is no easy way of calling a bottom there are many specific tools available for helping. These include classic reversal patterns like double bottoms, momentum convergence, candlestick reversal patterns, Elliot Wave analysis and DeMark indicators.

All of these indicators are preinstalled on the MT4 platform, and when applied to the fear factor, create an entirely different outlook on the price movements, but the human factor is the part of the equation that makes all the difference.

Put the two together and you’ll get a very unique and powerful trading strategy. Warren Buffet once famously advised investors to “buy when others are fearful and sell when they are greedy.” In 2008-09 at the height of the great financial crisis, despite fears that the whole banking system was going to the wall, Buffet followed his own advice and calmly bought up bank shares after they had fallen to bargain prices.

Although it took two attempts to get Congress to approve a bailout, in the end they did, and Uncle Sam came to the rescue. Bank shares promptly rallied and Buffet ended up making a killing.

Past examples of fear moving the markets

In 2016, for example, the Euro weakened as fears spread that nationalism was about to overrun Europe. Yet both in France's presidential elections, where Marine Le Pen the national front candidate lost to Emmanuel Macron, and in Holland where Geert Wilders populist Freedom party only won 13.1% of the vote, these fears proved exaggerated. After the elections, the Euro started a multi-month rally.

In 2011-12 the Euro also plummeted as fears of contagion and the ‘end of the Euro’ rocked financial markets after three countries, Greece, Ireland and Portugal, all defaulted on their debts. In the end, these fears proved overdone and the crises was contained. In hindsight, this is not surprising as the three countries’ combined GDP only accounted for 6% of the Eurozone total so the damage they could inflict was always likely to be limited. After the ECB intervened with a programme of measures, the markets calmed down and the for much of 2013 the Euro rallied.

What to watch out for

When checking financial news and e economic calendar, you’ll start to see articles that promote fearmongering. Your job as a trader is to ask yourself if the forecasting is any different from the usual. Brexit being one to examine. Look back over the last 12 months and see what releases have been affecting the markets and what happened immediately after. Was there a bounce back in price? The next time you hear doom & gloom, you might want to wait till the initial plummet has occurred, and then consider a buy order in time to catch the reversal.

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4 Steps to accessing the global markets

Step 1: Getting registered

It's very easy to open an account with Exness. Click here to open the sign-up page in a new tab. If you want to get everything done in the next 10 minutes, be sure to have a credit card, ID, and, proof of address by your side. You can choose to open a demo account without these things. Either way, everything you need to know is here in this two-minute video. Pause the movie as you go through the first three steps.

Tip: Account type depends on the amount you wish to deposit. Leverage is effectively an interest-free loan that the broker offers. It allows you to make a large investment from a small deposit. If you are looking for high profit with high risk, a higher leverage might be right for you. If you prefer slow-burning safety with lower results, then keep your leverage low. You can never lose more than you have, but higher leverage means faster results... both good and bad.

Step 2: Prove who you are

Exness takes security very seriously, and they check every client signing up. Just like opening a bank account, you'll need to prove who you are before getting access to the global markets. Watch this one-minute video to see how.

Tip: While you're waiting for your real account to be approved, open up a demo account and start getting to know the trading platform.

 

Step 3: how to get access to the market

Trades are made using the award-winning MT4 trading platform. Inside the box of the demo or real account you'll see a gear cog. Click the gear cog to make a deposit. Use the passwords provided in the email. Click the gear cog again and select SIGN IN TO MT4 WEBTERMINAL then follow this one-minute video. You're about to make your first virtual trade on the real markets.

 

Step 4: making a trade

As a default, the top currency pair on the list will have an open chart. Right click on the chart and select the “close” option.

As a professional trader, selecting the right pair requires some research. For a first-time test, any pair will be sufficient. Drag a pair from the list of currencies on the left side of the trading terminal. The old saying goes, “what goes up, must come down.” Obviously, this principle goes the other way too. Your mission is to find a moment when the price direction is going to swing or reverse. If you feel the price is about to go up (bullish), then BUY, if it looks like it’s been trading high and the price has started a downward (bearish) trend, then SELL.

There are many ways to open your trade. You can select from the buy and sell options on the top left of the chart. Preferably, double-click the currency pair on the list. Right click on the chart when you’re ready to make your first trade. Time to set the volume depending on how confident you are in the direction you are forecasting. This is the perfect time to set your stop loss and take profit. Click the arrow to the right of the stop loss and take profit prices.

Note how the blue and dark red lines in the popup graph sit above and below the buy(ask) and sell(bid) price. In the example, we traded long (buy) and got a message confirming the order was successful. If you get an error, your volume was too high for your balance, or your stop loss/take profit was too close to the spread. Remember, every order starts as a negative because of the spread. Be patient. Your take profit will activate when the time is right, and your stop loss is protecting you. To close an order, you have three options. Click the X on the right or right-click the order. If you double click the order, you can close or modify the order.

Congratulations! You now know how to make a trade. Forex trading can be an exciting way to spend your free time, and you'll actually learn some real-world skills that will serve you well throughout your lifetime. Be patient, learn, and who knows, you might one day be one of the lucky few full-time traders. How will you spend your day?

 

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This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation. This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the article. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles. Please note that past performance of an asset is not a reliable indicator of future results.



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