In the post COVID-19 era, remote occupations, including e-Commerce, virtual education, counseling, banking, and communications are going to dominate. But what of trading strategies?
In a Post COVID-19 Economy What Trading Strategies Might Work?
The world has witnessed the wrath of the coronavirus on a mass scale. Unfortunately, the damage is far from done. Pain, suffering, and loss of life has been coupled with unprecedented economic chaos, with hundreds of millions of people left jobless, wondering how they are going to pay for basic necessities. As the global economy slows to a crawl, and personal disposable income dries up, individuals are forced to make really hard choices. As a trader in the post COVID-19 economy, different types of trading strategies must be employed now, given the new normal we are all faced with.
For one thing, the global economy has undergone what economists call a shift. When these shifts occur, the ‘demand and supply’ curve abruptly moves in a different direction. This necessitates a rethinking of conventional trading methodology to accommodate new market conditions. The effectiveness of remote work is evident for all the world to see. Office workers that traditionally commuted to work, interacted face-to-face, and completed tasks in person are now taking their vocations, skills, and abilities online. This is having far-reaching implications for the global economy.
Even with the lifting of restrictions, and the loosening of social distancing, there has been a paradigm shift in the workplace, in the retail arena, and in all forms of economic interaction between human beings. As a trader, one of the essential elements necessary to profit from rising and falling markets is liquidity. When liquidity levels are low, market instability results. This dramatically impacts trading strategies. Among traders, the switch to home-based trading activity has been hampered to a degree by poor telecommunications networks, and unsuitable mobile reception. In the wake of the March 2020 market crash – the worst since the global financial crisis of 2007/2008/2009, traders and investors were scampering for cover across-the-board. While certain UK and US banks maintained trading activity on the floor at the exchanges of London and New York, this was the exception rather than the rule.
The trading climate, and the strategies that are employed to profit from rising and falling stocks, commodities, indices, and currency pairs hinges upon a variety of factors – many of which are not economic in nature at all. The expressions of fellow traders, the speculative sentiment that pervades the trading floor, the actions of key market players – these elements may be noticeably absent from the scene with the new-age, post coronavirus era. Isolation brings with it a unique set of challenges which need to be adapted to current market conditions. With liquidity in question, traders embrace different strategies to profit from the ebb and flow of the market.
The Market Has Switched to Buy-Side Trading Post Coronavirus
Increased uncertainty and extreme volatility have given rise to a new normal in the trading arena. Business Continuity Plans (BCPs) have been formulated by the most strategic of all enterprises, in an effort to counter the dramatic and unprecedented changes that businesses may face. Difficulties are part and parcel of the trading realm, but few people could have anticipated the devastation brought about by the global pandemic. Businesses which have successfully negotiated the coronavirus pandemic have done so with meticulous planning. It begins with the fusion of contingency planning, IT, and risk management elements. By putting these plans in place, several businesses have successfully moved away from buy-side activity to work from home activity. A myriad of challenges exists; notably security of access to servers from outside of business organizations.
From a trading desks perspective, this new normal requires ongoing innovation, distributed risk, and integration between external systems and internal systems. Massive and unprecedented investments in new technologies are needed to benefit from the new milieu. Research and development, AI, AR, algorithmic systems, pricing engines, and new strategies are needed. The new strategies will encompass things known as portfolio life-cycle solutions, with a tech-driven approach to activity. New tools and resources will need to be developed and implemented to facilitate buy-side traders in these volatile markets. Multi-dimensional trading processes will need to be simplified and optimized for the new normal.
How Are Traders Benefiting from the Volatility?
In March 2020, global bourses collapsed. What followed was whipsaw activity, with markets rising and falling at an unprecedented rate. This type of uncertainty is not for the risk averse; it is risk-on to the extreme. One of the key measures of volatility – the VIX – rose dramatically in Q2 2020, with the CBOE volatility index (VIX) averaging 32.83 in 2020 to date, opening the year at 12.47. This is double the average closing price of the VIX in 2018, and more than double the average closing price of the VIX in 2019. When volatility levels are high, people are selling stocks en masse. Known as the ‘Fear Index’ the VIX is an important measure of trader sentiment and it certainly factors into the type of trading strategies that are employed.
Important Trading Strategies Come to Light
Several important trading strategies have come to light in recent times. These must be viewed against the structural changes that society is undergoing as it pertains to socio-economic systems across the board. No doubt there has been a dramatic widening of the wealth gap between poor countries and wealthy countries. This is to be expected. However, the disequilibrium will move towards equilibrium over time. In the interim, there is plenty of money to be made by trading on systems, practices, technologies, and innovations that will bring about the rebalancing. Currencies like the GBP, EUR, USD, CAD, and JPY are being traded as emerging market economies start to show structural cracks post-virus. Investors tend to pull their resources from unstable regions with high volatility, in favor of lower-risk opportunities. At a time where runaway growth is an anomaly, developed economies are proving to be a safe haven for traders. Of course, there are many opportunities in developing countries for savvy traders to benefit from.
Industries that have been hamstrung include travel and tourism, including airlines, cruise ships, hotels, restaurants and the like. Pharmaceutical corporations working on vaccines, plasma, and antibody testing are showing promise. Day traders have increased in number at independent trading platforms across the board. As people stay home and try to earn their keep, they are turning to penny stocks and implementing short-term day trading tactics and strategies to shore up their portfolios and grow their net worth. While oil prices have cratered and rebounded, gold has shown resilience as a hedge against portfolio erosion. By focusing on a mix of tradable instruments which can mitigate the impact of a tsunami of negative sentiment, it is possible to prevent loss and turn a profit.