One Sure Trading Prediction for 2017 - And How to Prepare for It
Here's a hint: it rhymes with whisk (as in off your feet), brisk (as in fast-paced), and tsk-tsk (as in what did you screw up this time?). And it will at various times knock you off your feet, come at you quicker than you expected, and make you make mistakes. Risk is the one certainty in trading. Risky business is our business.
By Vikram Rangala
Friday, December 30, 2016 - 00:00
It's not just a figure of speech to say that risk our business as traders. It really is, in a concrete way. We might say that we're trading gold, or index futures, or the euro. But what we're really buying and selling is risk.
Let's use an example that's as old as history: gold. Humans have been mining and using gold as decoration and treasure since before the first civilizations, Imagine you bought gold in Spain around 1500, the time of Columbus, Pizarro, and Cortez. It probably cost a lot, because it was rare. Your gold might have been mined right in Spain, in the ancient Roman mines of Las Medulas. Or it could have come from Wales, or Romania, or even the Kolar Gold Fields of India. Because the supply of gold only increased slowly, coming from familiar Old World deposits, its value never crashed or suffered from wild fluctuations.
So even if the money issued by a king or emperor suffered from inflation or devaluation, gold held steady. Empires rise and fall, as they say. So having all of your wealth in the currency of any country carried a certain risk, especially in a war-torn continent like Europe. Remember that Spain at that time had the kingdoms of Aragon, Castile, and Granada all fighting for control. The only money that retained its value from one ruler to the next was gold.
Then one of those kingdoms (following the marriage of Ferdinand of Aragon with Isabella I of Castile) started stealing massive amounts of gold from the Incas, Aztecs, and others and shipping it home (along with new foods like potatoes, tomatoes, and chilli peppers). A lot of Spaniards suddenly were flush with gold (not to mention delicious new recipes like patatas bravas). After the Spanish Inquisition expelled all Jews but stole their property and gold, the country had even more.
But when you increase supply of something, it gets cheaper. Suddenly, gold, the indestructible currency, was subject to inflation. Even worse, the heirs of King Ferdinand and Queen Isabella spent even more than Spain was taking in from its vast New World colonies and mismanaged the economy. The defeat of the Spanish Armada by the British Navy was not the death blow some historians claim. But it was yet another upheaval, long before the American and French Revolutions.
So what were they really trading, if not gold (and potatoes)? The gold went from less powerful to more powerful hands, time and time again. That's not to say they were more deserving hands. But in the zero-sum game of a single transaction, one side's profit is the other side's loss. It's only in the bigger picture that you can make those transactions add up to a win-win. But in the short-term, one side takes on a smaller risk for a greater reward and the other takes on a bigger risk for a smaller reward. But as the balance shifts (as the market price moves), one side's probability of reward goes up and the other goes down.
Whatever the underlying product or derivative, that's the real trade: the ever-shifting probability of loss and gain. Wealth goes from less stable to more stable situations, from the leaky basket to the secure vault, ending up with the person who, by luck or intelligence or both, spots where the new equilibrium will lie.
That's why traders say that success isn't about how well you predict the markets, but how well you mitigate risk. In fact, it's not just traders who say that. Most successful entrepreneurs know that risk mitigation is the secret sauce.
So how does that help you decide what to do with an opportunity in Gold on the last trading day and hour of 2016?
Should you sell the binary option strike price just above the market. It's currently in the money (if you're selling). Or do you sell the out-of-the-money strike just below it?
Or do you buy, having decided that this may be a bottom and the market is due for a bounce? And if you do buy, do you choose the in-the-money strike below the market or the higher one? You could do any of these four choices or others and there would be good reasons.
What's more, you could have a reasonable probability of success with any of them. This is something that bothers beginning traders, because there isn't one clear best choice.
What makes your choice a good choice is how you handle the downside. Plan for possible failure. Know what you're going to do if the trade goes against you. This may seem counter-intuitive: why would you plan for possible failure? Isn't that pessimistic?
No, it's realistic. You plan for possible failure whenever failure is possible. You wear a seatbelt when you drive, don't you? Same thing.
Once you know the worst possible outcome, and how you have guaranteed that you will survive it just fine, it's easier to plan for the best outcome and those in between. That's why Nadex builds in a guaranteed safety mechanism: limited risk on every trade. You always know the worst case scenario because we tell you right on the order ticket.
Successful traders know two things about losses:
- They're going to happen
- I have a plan for surviving them and profiting in spite of them
So there's your 2017 trading forecast: expect risk. Every day, every trade. Oh, and there will be a new president and lots of stuff going on around the world and...it doesn't matter. When it happens, it happens and you can't control it. But what you can control is how you will protect yourself from risk and use it as leverage. Trade risk for reward in a consistent way. If you're on Nadex, you've already taken a big step towards doing that with guaranteed limited risk.
Happy New Year from all of us at Nadex. We wish you a prosperous and happy 2017, with risk that is limited and just enough to keep things interesting and profitable.
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