PRIYESH MEHTA

PRIYESH MEHTA

Head Research Analyst at Bovell Global Macro.

Should You Limit the Number of Assets You Use?

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For many people, getting started with trading requires many decisions to be made right from the beginning. Forex or stocks? Day trading or swing trading? Technicals or fundamentals? These are just some examples of decisions traders make early on (and usually without any experience). Another important decision is in regard to the number of assets you should focus on. 

 

I have seen forex traders suggesting that they only focus on a handful of pairs, whilst at the same time, stock traders have suggested they are open to trading any stock that shows up on their scanner. In both cases, these types of traders are focussed predominantly on technical analysis and to an extent, both suggestions are valid. 

 

For technical analysis to work, several traders need to be looking at the same levels on their charts and reacting to them. Although institutional traders focus primarily on the fundamentals of an economy or a company, they are likely to use some basic technical analysis to determine their entries and exits. Most institutional traders will only conduct technical analysis on the major forex pairs and indices, so the suggestion for retail traders to focus only on a handful of forex pairs makes sense in this respect. However, there are a range of opportunities in the markets on a regular basis, and by limiting yourself to just a few pairs, it could be argued that you are limiting your earning potential. 

 

At the fund, we take a global macro approach and are open to trading any assets at our disposal. We focus primarily on fundamental analysis to form our trading decisions and will not limit ourselves to a particular asset class or a set range of assets. The reasoning behind this is simple. Market dynamics change on a regular basis and opportunities arise from various events. Limiting ourselves to a fixed set of assets would either mean missing out on high quality opportunities or not taking full advantage of an opportunity. An example of this is the current market conditions. 

 

Prior to this year, a global macro approach to trading meant that most of my trades were in FX. However, this year, FX has made up a ridiculously small percentage of my trading volume and trading profits. Instead, the bulk of my trades have arisen from equity indices and commodities. As major central banks were forced to cut their rates to zero, the monetary policy divergence trade that typically drives currency pairs over the medium to long term, is pretty much non-existent. Most assets are moving based on the risk sentiment in the markets, and I have found that equity indices and commodities have provided both bigger and cleaner moves in these conditions. If I had limited myself to FX only, I would have very likely missed out on a range of opportunities this year, and so, I believe that this year has proven why it is important to remain open to trading a range of assets.

 

It is also worth adding that, even though I am open to trading a range of assets, it does not mean I try to catch every opportunity that arises. Fundamental analysis means a great deal of reading is required and a lot of information needs to be absorbed. It is simply not possible for a single trader to know what is going on in every corner of the markets and trying to do this would lead to information overload. 

 

I simply stick to a global macro approach, and when an opportunity presents itself, I will consider all the ways I can get exposure to the event. It is generally possible to get exposure to a single event via multiple asset classes, which means that I will try to spread the risk out across a few different assets. Although a single event may impact several assets, every asset is not going to have the exact same reaction. Therefore, splitting the exposure across a few different assets will reduce risk and provide a better chance of catching a larger chunk of the market reaction.

 

Over time, this also builds experience with a range of different assets, putting any trader on a better footing to enjoy continued trading success, even as market conditions change.

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