Researching financial assets before investing or trading is essential for sound decisions and profitability. Without research, trading becomes a gambling endeavor. There are certain steps to follow when researching financial assets, and we are going to describe the most essential ones below.
Research and Education
For making better trading choices it is essential to conduct thorough market research, and for research, a solid knowledge base is a must. When trading financial markets, there are certain research tools and methods traders and investors can deploy to increase their decision accuracy. Economic calendar, stock screeners, Forex technical indicators, and signals are a few to name. One place to find educational and market research tools is to visit the website myfxchoice.com/research-centre/ where various trading courses on Forex, trading indicators, signals, and calendars can be found for free. An economic calendar is a must-use tool as it offers macroeconomic news events, which are the main sources of fundamental analysis. Market news together with the economic calendar will guarantee the trader is always well-informed about important market events and trends.
Exact steps for proper financial assets research and using it in practice
Below are the steps required to conduct research and analysis needed before any trading or investment decision can be made.
Step one: Defining investment goals
Before we can even think about assets and which one to pick, it is critical to define what an investor’s or trader’s final objective is. Are you looking for long-term growth or short term gains? If a long term goal is your main drive then you are an investor and will need to analyze markets from a long term perspective. For long-term investing, a deep understanding of macroeconomic fundamentals is key to success. Warren Buffett is known for buying undervalued stocks and holding the portfolio for years to gain huge profits. Traders on the other hand focus more on short term trading activities to quickly gain small profits and need to analyze markets with technical analysis. It is very beneficial for trading to incorporate fundamental analysis elements like the economic calendar and market news, which we mentioned earlier.
Step two: identify the asset
After defining what your main goal is, the next natural step is to find the asset class which is the best for your goals. Investing and trading is possible for almost all assets including Forex, equities, indices, commodities, etc. Forex market can be very attractive as it is open 24 hours a day and provides non-stop trading capabilities. Stock markets are more predictable and inclined with fundamentals, and for investors stocks may be a better option. Lately, cryptocurrencies are gaining much popularity in both traders and investors as new emerging markets. After selecting the asset, it is time to go to the next step forward and understand its peculiarities and characteristics.
Step three: understand the asset fundamentals
Understanding the fundamentals of the selected asset class is critical to make profitable decisions. Before you can trade or invest in an asset, you need to know how the market works, who are participants, and which fundamental factors affect its price short-term and long term. For forex and other financial markets, fundamental indicators like GDP, Nonfarm Payrolls, interest rates, etc. are very impactful. Knowing this and using economic indicators can be of great value to predict the future possible trends with high accuracy.
Step four: develop a method to select instruments under the selected asset
Be it Forex, stocks, or cryptos, you will have to develop a method to select interesting instruments under certain asset classes. Which cryptos are going to move if investors decide to increase their investment in cryptos? There are certain conditions that allow traders and investors to select the most appropriate instruments for each market condition. If Nonfarm Payrolls is about to be released then the Forex market is going to be shaken violently and the best currency pair for news trading in this scenario would be EUR/USD. You will need to define how you will select the instruments which are most likely to make you profit. Developing a trading strategy with exact rules can be a lifesaver, as it helps eliminate information overload and other subjective noise.
Step five: assess the asset risks
Before you can go and open a position, you have to deploy a well-defined risk management strategy. For news trading, the risks are much higher, and it is essential to control how much you are willing to risk for a certain profit. The most popular risk-to-reward ratio currently is 1:2 meaning for every dollar you risk you expect a 2-dollar profit from the trade. If you are an investor, you will need to diversify your portfolio and what percentage of your capital to allocate to each asset. For trading, diversifying means not trading the correlated instruments to increase the chances of success.
Step six: execute your strategy and analyze your trading or investing performance
After executing and trading your strategy, it is important to write down all your trading and investment decisions in detail. Make sure you analyze your performance after a certain number of trades or investment decisions. Look for all losing trades and winning trades and try to notice what is a common occurrence in losing trades and if you can improve your strategy to eliminate losses without also eliminating profitable trades.