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Why Risk Management is Important Now | gt.io
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gt.io
Date:
29th Jun 2020
Author:
gt.io

Why Risk Management is Even More Important Now

The global pandemic has induced severe reactions across the financial markets, including stocks, forex and crypto. Worrying volatility levels have emerged, with traders resorting to panic selling. The March 2020 crash saw global stocks making a downturn of almost 25% to 30% on most G20 indices. The S&P 500 triggered market-wide circuit breakers 4 times in March, leading to trading halts on the Nasdaq and Dow.

Apart from the devastation caused by the coronavirus-induced lockdowns, geo-political tensions have also kept markets uncertain. The oil price war in March might have subsided, but it will take time for oil demand to return to pre-pandemic levels. Storage capacity is overburdened and in a world of disease control, economic output and air travel will remain dampened.

If you’re trading in forex or bitcoin, risk management is highly essential now. The markets might be soaring at present, but experts believe that a downturn and increased volatility could be just around the corner.
 
The markets have stabilised since the March downturn. Major indices, like the S&P 500, Dow Jones Industrial Average and Nasdaq, received a tremendous boost due to major economies reopening. By June 2020, the S&P 500 had recouped its losses, from the massive sell-off in Q1.

But if we look at the major volatility indices, all of them appear to have bottomed. The CBOE volatility index (VIX) surged from 15 in February to 85 over the next 5 weeks. After that, the VIX went into a sharp bear phase, plunging down to 24, finding support from at 200-day Moving Average by May 2020.

From there, it climbed back to 44, forming a “rounding base.” Both the CBOE Russell 2000 Volatility Index and CBOE NDX Volatility Index are forming late stages “rounding bases” too. After a low, they are set to rise again. Stocks typically decline when volatility rises.
 
Since June 24, 2020, the markets have been choppy, with rising coronavirus cases in several US states, along with a potential second wave in China. The S&P 500 lost 5.89%, while the Dow was down 6.9%.

Bitcoin/USD traders are also experiencing volatility. On June 24, BTC dropped below $9,000, only to rise back to $9,300 on June 25. Recent emotions in the crypto market have been slightly bearish. Since early May, BTC price has seen a lot of rejection near the $10K level. Although investors have bought into every price dip, there is a fear that prices could again drop below the $8,500 mark, if the equity markets fall.

BTC price has been showing an increased correlation with S&P 500, which is being considered the actual cause of this price volatility.
 
Many other factors are likely to cause increased volatility in the days ahead. This includes the Brexit negotiations. The UK and EU are still not on the same page regarding many important economic issues, and the chances of a no-deal Brexit appear possible now. There are risks of further tensions between the US and China, regarding the trade deal. Although President Trump has reassured that the deal remains “fully intact” for now, relations between the two nations are on thin ice. The US Presidential election is scheduled for November 2020, which will set the course for the country’s future foreign policy.

Volatility in the financial markets provides opportunities for traders. At the same time, volatility also means higher risk of capital erosion. Risk management is always important in trading forex or crypto. Under current market conditions, it has become even more critical.