Trading tip: learn how to trade different asset classes

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Different asset classes react in different ways to various fundamental developments. You may have short-term Treasury bills that are selling because the central bank is tightening monetary policy.

By extension, a currency pair may be in an uptrend because the central bank of the appreciating currency raises interest rates while the central bank of the depreciating currency lowers interest rates.

You can also have different sectors of stocks reacting in different ways to the economic cycle with cyclical stocks going down during tough times and defensive stocks, on the other hand, going up.

Build trading strategies

When you build your trading idea, you need to find a market where your idea can be expressed in the best possible way giving you good asymmetric bets. This process will also keep you disciplined as you will seek only the most compelling trades and refrain from taking trades out of boredom. Remember that your job is not to trade but to make money.

Let’s see an example. Imagine you have two central banks starting to tighten monetary policy and the risk sentiment picture is murky. Given this, you can have the corresponding currency pair just going and giving you no high probability trade.

What you can do, however, is trade the Treasuries short term, as a tighter policy will cause these securities to be sold. This way you reduce your risk and increase your chances of success at the same time.

With more experience you will begin to notice that when you have strong conviction in your trade, because you clearly see the reasons for taking a position, your psychological pressure will be much lower compared to times when you are forcing trades by trying to outsmart the market. As the saying goes “when in doubt, stay out”.

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