Historically, the financial markets are notorious for their crashes, from the unprecedented oil crash of the COVID-19 pandemic when prices plummeted below zero to the fall of the Zimbabwean dollar due to hyperinflation in the late 2000s.
To minimize the risk associated with market volatility, seasoned traders adopt the practice of portfolio diversification.
Portfolio diversification
When global economic uncertainties mounted during the COVID-19 pandemic, many sought refuge in gold, an asset traditionally viewed as a safe haven.
This demand drove the bullion above $2,000. But as soon as pharmaceuticals announced breakthroughs in vaccine R&D, its price crashed, leaving traders with high exposure to gold to incur huge losses.
Cue portfolio diversification, a strategic approach traders adopt to allocate funds across various assets and asset classes in order to mitigate their exposure to risk.
Asset classes such as stocks, indices, energies, and metals can have very different risk profiles and returns on investment. This means that traders can take control of their exposure to risk by simply diversifying their portfolios across various assets.
Asset allocation and market interrelatedness
The markets are inherently interrelated and the ebbs and flows in one can ripple across others. Therefore, before making any investment decisions, traders must analyse market influences and their ties to economic events, such as inflation.
In addition, some markets are positively correlated, meaning that the prices of those assets generally move together, while others are negatively correlated, which indicates that prices will move in opposite directions.
By observing these relationships, traders will be better able to anticipate market shifts, seize emerging opportunities, and, most importantly, protect their investments against adverse market conditions.
Armed with such insights into market dynamics, traders can then discern which instruments to consider in order to refine their diversification strategy.
For instance, if gold and the US dollar share a negative correlation, a trader may consider investing in both, anticipating that a loss in the former can be countered by a gain in the latter, or vice versa.
A step beyond diversification
Navigating the unpredictable nature of the markets requires traders to master risk management tools and techniques such as take-profit, stop-loss, and hedging.
However, market volatility also calls for a broker that is both reliable and innovative, a broker that truly sets itself apart through its selection of tradable assets, better-than-market conditions, lower trading costs, and exclusive protections.
The abrupt price swings of the markets can result in sudden stop outs of traders’ activities. Stop outs occur when the losses from trades are bigger than the funds available in a trader’s account.
But sometimes, the markets experience short hiccups which are quickly corrected. These price spikes can be devastating for traders as they can trigger ‘false’ stop outs.
At Exness traders’ activity is further protected from such hiccups with the Stop Out Protection. By giving traders half of their spread as a buffer, the broker allows time for trades to bounce back. In fact, since the introduction of this exclusive feature, traders experienced 30% fewer stop outs.
To further mitigate high volatility and ensure its clients receive the best possible conditions, Exness analyzes market data from various sources.
This delivers fast execution along with low, stable spreads. Plus, traders can execute orders of any size with the same favorable pricing thanks to Exness’ no market impact model.
In addition to better-than-market trading conditions, one of Exness’ main advantages lies in its seamless deposits and withdrawals.
Damian Bunce, Exness Chief Customer Officer, highlights the company’s distinct approach stating, “We engineered a solution which ensures trust at the point of trade, which means there are no delays in downstream processes.
This epitomizes our innovative approach and our commitment to providing an experience with no frictions.”
Beyond its own values regarding its clients’ safety of funds, Exness adheres to risk management policies that meet the regulatory standards of authorities in several jurisdictions including the Capital Markets Authority in Kenya.
Reflecting back on historical market crashes, it is evident how volatility can become an obstacle to traders’ aspirations for profits. While portfolio diversification can play a critical role in navigating traders through unpredictability, with its commitment to reliability and advanced algorithms, Exness ensures that traders are empowered to enter the markets with enhanced confidence.
This commitment is reflected in the results of over $4 trillion in monthly trading volume reported as of August 2023, making Exness the largest broker in the world.