Trading Markets and The Economy

Intermediate • Course 3

When analysing an asset, traders consider technical analysis, pricing, trading plans, etc. However, it is also important to take into consideration external factors which may affect the price of the asset. For example, market conditions, correlations and the economy.

Correlations

A correlation is a relationship between two or more assets which are proven statistically. Assets which are correlated can either be positively correlated or inversely correlated. A positive correlation means the two assets move hand in hand. For example, Gold and Silver increases and decreases similarly. An inverse correlation is when one asset is increasing while the other is decreasing. Correlations are also important in order to ensure traders are not overexposed.

Market conditions

Market conditions refers to the state of a current sector of asset category. For example, the stock market, technology market or cryptocurrency market. Traders take the market conditions into consideration in order to determine how the price is likely to move in the medium to long term. Traders should also note that assets within the market tend to move hand in hand. For example, during a stock market boom, most stocks are increasing in value. During a stock market crash, most stocks are declining in value.

The economy

The economy of course has a strong influence on how traders invest within the financial trading markets and as a result this influences the price of assets. For example, during recessions, investors prefer cash investments, bonds and safe-haven assets. Whereas, during economic growth, investors prefer to invest in more risky assets such as stocks, ETFs, cryptocurrencies and derivatives. When evaluating the economy, investors analyse inflation, interest rates, fiscal policy and economic data.

So even though analysis of a specific market and the economy is not necessarily used to pin-point an entry and exit point, it is used to ensure you are trading in the right direction. This is specifically relevant when trading in the medium to longer term.

Derivatives are complex instruments and come with a high risk of losing money due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the risk of losing your money

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