Is it simply that we want to find undervalued investments? Or are there strategies by which we can increase our returns and reduce our risks?
The first point may seem obvious, but a lot of people seem to forget there is an inverse relationship between undervalued and overvalued assets.
The chart above illustrates the correlation between the market value of a commodity and a broad equity index. The more it declines, the less we want to trade.
However, the longer the commodity stays in a downtrend, the more attractive it becomes as an asset class.
The trend in oil is not a direct proxy for a trend in equity prices. However, that commodity has a lot of downward momentum:
If oil prices were to start a new downtrend in December, it may help to lower our risk of price reversals and price movements in currencies like the US dollar.
It doesn’t have to be a great investment, but it will help.
The second point is that some of our risk aversion can also be a problem. You may be a trader who fears losing control of an underlying asset, whereas another trader may be more willing to accept a lower risk of the return on that asset.
I’ve found that trading is most difficult when it comes to currencies. A trader who is willing to place a bet on a higher value of an exchange rate is more likely to win.
I’ve experienced this myself quite often when I was trading with Bitcoin.
Sometimes, when it’s risky to engage in the activity, it’s even more risky not to.
What do you think? Is there a way to mitigate your risk aversion? Would you trade more with a currency like the Euro or Yen, or do you think we should trade in only U.S. dollar-denominated assets? Let us know in the comments below.
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