Talking Points:
- There are two types of returns to be found in the markets: income and capital gains
- Buy-low-sell-high mentality is capital gains that traders primarily pursue
- Steady returns paired with low volatility are the objective of the investors
What are the Traits of Successful Traders? See what our studies have found to be the most common pitfalls of retail FX traders.
There are two general means for making return in the markets: collecting steady and predictable income or actively seeking capital gains. Which method an individual depends on says a lot about their approach to the markets. The preference among the masses tells us much more about the convictions and bearings of the market itself. Conditions are decisively skewed in favor of the tactical trader. However, the expectation of enduring gains in risk-oriented assets with benchmarks like the S&P 500 pushing record highs seems to reflect an expectation of robust value investing. Expectations and conditions don't align, and that should give market participants pause.
When the value investor looks for opportunity in the market, they look for the highest expected 'income' return (dividend, coupon yield, carry) against the lowest possible level of market-derived volatility. With market-based rates near record low levels, the dependency on quiet markets is exceptionally important. Recent bouts of volatility are existential threats to these passive investors and the higher rate of activity historically in FX versus other assets makes investments like the carry trade significantly in the spectrum of possible options. In contrast, the trader is less worried about the current low level of income and is focused on entry and exit. That leverages the importance of time in the market with a greater emphasis on productive volatility.
With market-based rates of returns at generational lows and volatility measures like the equities-based VIX scraping below 12 percent, conditions are explicitly oriented towards the active speculator and pose serious risk for the passive investor. And yet, the winds that have supported such risk-dependent assets and the quiet that has kept them unscathed to this point feed potentially-dangerous complacency. This does not call for an immediate move to fade prevailing trends, but it does necessitate a greater degree of caution in operating in markets today. Flexibility along with a vigilance of volatility and its sparks better prepares us for what lies ahead. We discuss market conditions from a return's perspective in today's Strategy Video.
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