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BLOG: Chinese Medicine – A bitter pill for retail traders?

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With uncertainty rife in China, Ed Eger president and chief executive officer of OANDA Corporation, asked its traders for their top tips on how to trade in this environment.

All eyes have been on China for some time now. In August last year, the Chinese government took drastic steps and devalued it currency, the yuan, for three consecutive days. Global stockmarkets across many major asset classes went with it.

The treatment has continued since then with an ongoing series of shock government devaluations, unpredictable equity markets, sinking commodity prices and fears of an economic slowdown.  The February G20 Finance Ministers and Central Bank Governors Meeting in Shanghai hasn’t calmed the situation.

While it may not all be doom and gloom for China—they did buy back much less of their own currency in February 2016 – something which may indicate some stabilisation. If the Central Bank’s currency reserves continue to fall then the government might be tempted to allow another sudden drop in exchange rates.

There may be more shocks to come. We asked our top traders for advice on trading in uncertain times. Their top tips? Keep an indelible focus on risk management through discipline, careful use of leverage, focusing on cash management not big wins and having a multi-faceted trading plan in place.

Remain disciplined

According to top traders, the key to avoiding trade-induced nausea is to be disciplined. This means having the discipline to stick with pre-determined trade sizes, entry points and exit points, even if the markets are taking your gut on a wild ride.

Our elite traders reported that their positive track records come not from big wins, but by sharpening and executing strategies in a consistent fashion. Their focus is on taking more profit from the market than what they give away over the long run, rather than concentrating on specific wins or losses from individual outcomes over the short term.

Putting a strategy in place that is balanced and in-line with your preferred level of risk will help minimise the fear and stress that can often paralyse new traders. This means putting up the right amount of capital which allows you to make a worthwhile profit without risking too much on a loss. Stop losses can help in this regard – they reduce stress because you can gauge the potential loss of a trade.

Be careful about excessive leverage

With great power comes great responsibility; this adage rings especially true with leverage.

Leverage can build profits, but with the wrong approach it can also destroy a trader’s work.  Leverage should therefore be handled with care. Just because you have the ability to unsheathe maximum leverage, doesn’t mean that you should every time. In fact, many top traders report they seldom use the full amount at their disposal.

Above all, traders want to decrease the likelihood of a margin closeout, where losses hit a threshold that triggers the closeout of all positions. Along with minimising account leverage to a level that best suits your experience and risk appetite, limiting the number of open positions and using smaller position sizes is also key.

Focus on effective cash management, rather than the ‘big win’

Being disciplined isn’t just about minimising loss, it’s about sticking to your trade plan. Many of our traders said they focus just as much on taking returns off the table as they do with risk.

Success is less about knowing when to call the top of the market, and more about profit taking as dictated by the strategy. A succession of upsides can tempt traders to leave money on the table for longer than their strategy prescribes, which may expose them to sudden downsides.

Good cash management also extends to trade sizes, with many of the best traders starting relatively small and increasing trade sizes only as they grow their earnings.

Have a balanced, multi-faceted trading plan

Beyond stop losses, trade sizes and leverage, the best traders use an array of information to guide their strategies. While it’s known that advanced retail traders utilise charts religiously, many of the traders surveyed said they also keep up-to-date on macro-economic events.

Doing so is key because trading opportunities are largely driven by changes or perceived changes in macro-economic relationships. That’s why our elite traders run off a multi-faceted trading plan, built on multiple sources of information so the risk and opportunities are understood in equal measure and are as clear as possible.

Volatility from China shows no sign of slowing and there are likely to be other surprises in the markets coming in 2016. With emerging markets struggling to gain traction, potential European deflation and the Bank of Japan’s decision to enter into negative interest rates, as well as the upcoming UK referendum on ‘Brexit’, the year ahead promises plenty of opportunity amidst turmoil. Traders can make the most of this, as long as they make sure they stick to their trading strategy and manage their risk.

Ed Eger is president and chief executive officer of OANDA Corporation, a financial technology company that provides retail trading and currency information services globally