5 Trading Lessons to Take Away From 2016

For traders, 2016 was one of the most eventful years in recent memory. It also taught us important lessons about the financial markets, trading psychology and the value of “expert forecasts.” For many, these lessons are painful reminders that there are no guarantees when trading the markets.

Below we draw your attention to five important lessons from the past 12 months. Make sure to reflect on each one before saying goodbye to the year that was.

  1. Assumptions can prove fatal.

The financial markets are a dynamic place where assumptions can often prove fatal. Traders came into 2016 with many assumptions about geopolitics, elections and market fundamentals. They left it licking their wounds.

To be fair, many of these assumptions didn’t originate from traders themselves, but from the biased media and highly flawed polling industry. If you listened to the experts and the pollsters, there was no way the United Kingdom would vote to leave the European Union or for Donald Trump to win the US presidency. Not only did these events materialize, they took the financial markets by storm.

Traders should enter 2017 with a chip on their shoulder and a heavy dose of skepticism. This will help them to avoid making assumptions that can prove costly down the road.

  1. Always look at the bright side.

Regardless of what transpires in the financial markets or in life, there is always a silver lining. Traders learned that the hard way after the United Kingdom voted to leave the EU on June 23, triggering the biggest two-day sell-off in stock market history. After all, that sell-off created a buying frenzy, as traders snatched up undervalued equities.

The prospect of a Donald Trump presidency spooked traders for much of the year, until the unthinkable happened on November 8. Rather than cut their ties and run, traders reassessed the situation and found the good in a Trump victory – namely, promise of faster economic growth that could feed into domestic and global markets. The financial markets are often filled with doomsday scenarios, but there’s always a positive trade that may be made.

  1. Idle chatter gets you nowhere.

With oil prices at 13-year lows, the Organization of the Petroleum Exporting Countries (OPEC) successfully played on traders’ hopes by “talking up” the market. Whether it was promising to work with Russia to freeze crude output at January levels[1] or vowing to strike a new production agreement at the Doha Summit in April, the cartel did a lot of talking and not much acting. That is, until Gulf states could no longer bear the burden of plunging prices. It was at that point – in Algeria, no less – that OPEC finally agreed to curb output. And even then, traders had to wait an extra two months before the deal was made official.

While OPEC may have finally gotten a deal done, several question marks remain. For starters, who will police the deal? What happens when US shale producers increase their output? Can we really believe that Saudi Arabia and Iran are working together?

OPEC was the master of idle chatter in 2016. Whether it’s the 13-member cartel or some other political group, traders should look for hard evidence before making a move. Seeing past idle chatter is a true test of patience.

  1. Diversification: a lesson for every year.

The financial markets saw a lot of volatile swings in 2016, reminding us of the need to diversify as much as possible. Diversification is a simple financial concept that tells market participants to allocate capital in a way that reduces their exposure to any one risk. In other words, don’t put all your eggs in one basket. With the financial markets at your finger tips, it has never been easier to diversify in stocks, indices, commodities and contracts for difference (CFDs).

Along with diversification comes powerful risk management tools that may help you avoid the downside of the markets. Stop-loss and take-profit orders should be used regularly in your trading regimen to avoid blowouts and lock-in profits. The next 12 months may feature several high-profile events that may leave you wishing you had a contingency plan.

  1. Avoid the herd.

In the financial markets, it pays to have your own voice. Herd mentality describes how market participants might be influenced by their peers to adopt certain trades or behaviours. At its worst, herd mentality might lead to asset bubbles and market crashes. Herd mentality was on display following Brexit and in the lead up to the US presidential election. In the case of the latter, everybody just assumed that Trump would be bad for the markets. That view began to change mere hours after he was elected.

Herd mentality may also be partially responsible for the massive rise in US stock indices since November 8. For traders looking to make 2017 a success, following the herd might not take you to the promise land. Traders must conduct their own analysis on every trade they make. This includes developing their own worldview of the market. This shouldn’t prevent you from reading market analysis and opinion, but don’t let those insights form the bedrock of your investing strategy without proper research.

These five lessons will be sure to resonate in 2017, as traders look to navigate an increasingly complex climate. So, be sure to avoid assumptions, do your own research and be optimistic. By following these lessons, the next 12 months should swing in your favour more often than not.

[1] CNBC (February 21, 2016). “Russian energy minister says oil output freeze deal will be done by Mar 1.”

The post 5 Trading Lessons to Take Away From 2016 appeared first on Forex.Info.

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