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Mastering Asset Classes – The Full Market Breakdown

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Hello and welcome to this latest edition of courses on demand brought to you by Forex.Academy. So with this course, we’ll be looking in quite some detail, in and around the whole topic of asset classes. However, just before we explain what’s involved, please do take a moment to familiarise yourself with our disclaimer. If you do need to stop and pause this particular recording, please feel free to do so. Obviously trading financial markets is inherently risky. There are risks associated with those with trading these markets, so please do familiarise yourself with our disclaimer!

 

Ok so let’s explain what’s what we cover in the course on demand. So we’ll start off by defining asset classes, then we’ll have a look at the different types of asset classes which us as traders can trade. We’re talking about the forex markets to commodity markets, the stock markets, the global indices markets, bond markets, and I’m sure you’ve got a very basic understanding that all of these types of markets exist and I’m sure you’re very aware of the cryptocurrency markets as well.

Then we’ll have a look at trade selection, some considerations that a trader will need to make in order to determine which markets they should be looking to trade, and some of the dangers that are involved with that.Then we’ll look at the potential diversification and what that means, and how it can be applied in a very practical sense. And we will just finish this webinar with looking at asset classes, and how to access them on our metatrader4 trading platform. So that’s what you can expect over the course of this webinar.

Ok so let’s start with a definition of asset classes. It’s very simply a group of markets which have similar financial characteristics and behave similarly in the marketplace. So to try and break these down for you, the six major tradable asset classes for traders are as follows.

We’ve just alluded to some of these and ‪the‬ ‪foreign exchange markets and what we’re‬ talking about are foreign exchanges in your currencies. So, for example, you will see a symbol, like EURUSD currently up on screen, and the number of these markets are vast. We shall discuss each one of these in some considerable detail, so this is just a very basic overview.

The next major asset classes is obviously your commodity markets. So, for example, your gold or your oil markets, and then we’ve got global indices like your SP 500, the FTSE, or the Nikkei, or whatever the case may be. And we’ve also got stocks and these are individual companies like Microsoft, Facebook or Apple.

So obviously traders can select and decide what best suits their personality and approach, what they have a genuine interest in trading, and they’re able to do so. Traders can also access bonds. For example, Eurobond. Or the 10-year note, for example. And finally an asset class which is very new and fresh in everyone’s mind with the incredible moves we’ve experienced within the cryptocurrency markets certainly over the last 12 months, for example, you have cryptocurrencies like Bitcoin.

Okay, well what is important to notice is that each of these asset classes can react differently to major news events. So if you get a particular news event, they can impact the global indices in a particular way. And of course they could then impact like, the government bonds, for example, in a particular way. So it’s just important to bear in mind that there’s alot of aspects that can influence these markets, and they can react accordingly in a way which is relevant to each individual asset class.

 

So let’s start with the Forex Markets which are also known as ‪the Foreign Exchange‬ Markets or the Currency Markets. So let’s start with a definition. It’s a market in which participants can buy, sell, exchange, and speculate on currencies. So ‪the‬ ‪foreign exchange market is considered to‬ be the largest financial market with over $5 trillion in daily transactions. Now this, just out of interest, is considerably more than your future markets and your equity markets combined. So we’re talking about an incredible amount of potential volatility and price action on a daily basis. Some of the markets, which I’m sure you’re very familiar with, in the currencies, major global currencies, would include like your dollar, euro, the pound, the yen, the Swiss franc, the Canadian dollar, the Aussie dollar, and also the the Kiwi or the New Zealand dollar. Now, these are all regarded as your major currencies. What this means is you’re going to see when you exchange currency, you’ll be exchanging one currency for another.

So when we talk about majors, we’re talking about currencies which have the dollar on one side, so you’re trading it with the dollar. Now, these also happen to be the most frequently traded markets and you’ll experience lower spreads in these markets. So, slightly more affordable for those of you that are trading with smaller accounts. And, they’re the most liquid. So you get often a lot more opportunities within these markets. Now the EURUSD is the most traded, by a country mile, with nearly 30 percent of the entire foreign exchange market. So that just gives you a little bit of an indication in terms of how large the EURUSD is in terms of a standalone currency.

Now in addition to our majors, we also have the miners, or what are also referred to as the crosses. Now these, to differentiate, are very much non-USD major pairs. So we’ve alluded to the majors – they would have the GBPUSD, the AUDUSD, the USDCHF, the CADUSD. So whatever the case may be, those are your majors. But when you’re talking about the minors, we’re talking about non-US major pairs. The most active and the most liquid are obviously your currencies like the euro, the pound, and the yen. So to differentiate the majors, you might be trading the GBPUSD. Whereas, if you’re trading a minor or a cross you could be trading the GBPJPY or the GBPAUS, for example. So that differentiates the difference between your major currencies, currency pairs, and your minors, or the crosses.

So what we also have is your exotics. These are, you know, global major currencies mixed with an emerging or strong small economy. For example we’re talking about exotics like the Hong Kong dollar and Singapore dollar and also things like your Swedish and Danish kroner as well. So those are major global markets which you can trade, but please do be aware that the liquidity, the spreads, may be a little bit higher. You might not get, you might experience, a little bit more reduced liquidity in some of those markets. so you have to weigh that up if you’re deciding to trade exotic currency pairs.

Okay, so just a couple of points to be aware of. Traders are interested in the perceived strength or weakness of one jurisdiction relative to the other. Foreign exchange markets must be traded in pairs because you exchange, as I’ve alluded to earlier, one currency for another at a particular price. It’s this price which is a huge interest to not just people who exchange currency to go on holiday and they want to get as much money as they can in exchange for whatever currency they happen to hold, but also traders who are acutely aware of the price of various different currencies. So it’s this price which is the value of the first listed currency, which is often referred to as the base currency, relative to the second listed currency, which we refer to as the quote currency.

So, to just give you two or three examples, up there on screen, you can see we have the GBPUSD. So this particular market would be referred to as the cable market, for example. It’s just the other name in which this market is known. And what we can see is the first listed, so we’re talking about the first three letters in this particular symbol, is referred to as the base currency. And it’s the relative value of the base currency relative to the second list of the currency. Which is actually the quote.

So we’ll show you very shortly, when you look at this market it doesn’t matter how you perceive or how you receive these prices, it always means the same thing. So what we’re interested to know is how much, what exchange rate, you would get for each and every one pound. Because there will be a predetermined price which will determine how much US dollar you will receive for one British pound. And the same applies with the base currency across all the pair’s. So the base currency we will when we look at the price quoted for the EURJPY. We will know and understand how much yen we will receive in exchange for one euro. And finally the Aussie CAD, we will see how many Canadian dollars we will receive for one Aussie dollar.

So that’s just a little bit about how to interpret and how to see and understand what is happening with these currency markets. So to just explain it, and I’ll give you a nice little example here, this is the GBPUSD market. Now, the price you see quoted is how many units of USD it would take to acquire one pound. So for each and every pound, and it doesn’t matter if you see it in a newspaper or on the television, in whatever capacity, you will see the quoted price which is the exchange rate for the number of US dollars. Because it is the quote currency in exchange for the base currency, which is the British pound.

So in all of these occasions on a price chart we will see that we will get 1.4084 US dollars for each and every pound. And these images were taken at slightly different times, so there’s a slight variation in these prices, but it effectively means the same thing. So if we exchange one pound we will receive 1.4083. And just finally we’d be exchanging the British pound in exchange for US dollar at the rate of 1.4078.

Now what’s important to notice, you can see that this is five decimal place and some of these are quoted to the fourth decimal place. So what’s important for us as traders is the fourth decimal place. So in reality, there is a meaning behind the fifth decimal place, but it’s just a smaller unit. But what we focus on largely is the fourth decimal place. So it’s actually 4083 that is of any interest to us. And 4078. And as you can see on the top right hand corner of screen you’ll have the 4084. So it’s to the fourth decimal place for the vast majority of foreign exchange pairs. Now there is a couple of caveats to that, as there always is, like if you’re trading yen pairs for example. Then it’s a two decimal place. So you have to be aware of how the price is quoted in each and every market that you decide to trade, but that will come obviously with experience. Okay, so that’s just a look at ‪the foreign exchange‬ markets and how to have an understanding of price change.

So moving on then to the commodity markets and to give you a brief definition. A commodity market is a physical or virtual marketplace for buying, selling, and trading raw products. So there are two types for you to be aware of. There’s hard commodities, which are typically natural resources that must be mined or extracted out of the ground.  We’re talking about your gold mining for gold, natural gas, and oil drilling for oil. But then you’ve also got your soft commodities which are often your agriculture or livestock commodities. For example, corn, wheat, sugar, and pork and products of that nature. And just give you a bit of an image, you can you can see from the commodity markets, which are currently up on screen, that a lot of these are extracted from this beautiful planet of ours and they’re traded on an exchange, and they can present some significant opportunities for us as traders.

So currently, just for your information, currently over 50 physical and virtual commodity markets are tradable through a particular exchange. So a commodity market can create a large economic impact by influencing the prices companies pay for certain raw materials. And this is very important to take note of – this can become extremely volatile often due to geopolitical risks and periods of instability and where they become very reactive to changes in global demand.

So we’re all familiar with the devaluation in the oil markets. For example, in 2014 it really impacted the demand for that particular commodity market. Price dropped excessively over a fairly short period of time. And as demand comes back into that market, so does the price start to increase. So that is just a very brief overview of the commodity markets.

So moving on then to the stock markets. So again to start with a very brief definition. A stock market is where shares in corporations are issued and traded. The key component actually of a free market economy. That’s worth taking note of. Stock markets serve two main functions. Firstly, it provides companies with access to capital. Very, very important. It’s a fantastic source. To be able to access capital for a whole host of particular reasons, whether it’s product development, or expansion, or employing more people, whatever the case may be. It will enable markets which are floated on the stock exchange, it’ll enable them to to generate that capital, what they need to grow.

Now secondly, they also provide a way for investors to participate in the company’s growth and quickly convert shares into cash. So that’s one of the reasons why your stock markets or equity markets are very commonly traded. They’re a part of a lot of traders portfolios for a variety of different reasons. And it’s the fact that they can be converted into cash as well fairly quickly. But they can get involved in, that participation of, the success of a particular company. So stocks for example, equities and shares, it’s all the same. We’re referencing the same market. They’re listed and traded on global stock exchanges, for example, like your New York Stock Exchange, which I’m sure you’ve all heard of. And you’ll find companies like Coca Cola and Ford listed on the New York Stock Exchange. You have other companies which are which are listed and traded on the Nasdaq Stock Exchange. You’ll find companies, you know a lot of your tech companies, like Facebook and also Google and companies of that nature, you’ll find those stock markets available through your NASDAQ exchange. We’ve also got the London Stock Exchange, and you’ll find companies like BP and Barclays Bank. And of course in Europe you’ll have the Euro next market. So, you’ll find companies based in Frankfurt in Germany. You’ll find companies like Heineken, and BNP Paribas, as well, listed on those particular exchanges. There’s many, many more exchanges and stock markets. And that’s where you can, you have, the potential and the ability to trade the performance of those companies listed on those exchanges. And so that is hopefully just a brief introduction to the asset class of stock markets.

So moving on then, to the indices market, and to give you, to start with, a definition. This is simply a composite, or a basket, of stocks which have been put together or weighted to create one aggregate value that’s used to measure a sectors performance. And that’s the important part to take away from the variety of different global industry markets. So just to give you an example, you may have heard of the S&P 500. Now the S&P 500 is simply a composite, a combination, of the top 500 largest companies in the US, in this particular example. Now, a price is quoted for that S&P. And that is traded by many financial institutions on a global basis. So in addition to Standard & Poor’s, when we just go through, we just select a few of them, a few global industry markets, you have like the Nasdaq. Which is this time a slightly different composite of the hundred largest non-financial companies in the U.S., in this particular case. Now there’s a strong focus on your large cap technology companies. They’re very much weighted within the Nasdaq market, so it does react to changes in technology and development. So that’s your Nasdaq market. You also have the FTSE, which is a composite of the top 100 largest companies in the UK. And to finish, you’ll have the DAX, which in this case is a composite of the top 30 largest companies in Germany. And finally looking over towards Asia we have the Nikkei and this is a composite of the top 225 largest companies in Japan.

So as you can see, there’s a variety of different global industry markets. They all have slightly unique characteristics and react to different things at different times. They’ve all got a unique personality to each of these markets, and that’s worth taking on board as well, if you decide to trade your global energy markets.

Okay so moving on then to the next asset class which is your bond markets or also referred to as the debt or the credit markets. And to give you a brief overview of the bond markets, the bond market is a financial market where participants can issue new debt. And this is known as the primary bond market. And the reason for this is, it enables companies and governments to be able to issue new debt, and enable on the primary bond market to generate capital through the issuance of different types of debt and credit notes. And that will enable that particular company or government to be able to generate additional capital in order to finance a whole variety of different products. That is very much regarded as the primary bond market. But what most traders will be involved in is the buying and selling of these debt securities, which are known as the secondary bond market. And these bonds can vary in duration until maturity.

So what we want to take away from this is that we as traders can trade derivatives as well, based on these government bonds. So think of a bond as perhaps an IOU given by governments or companies. To pay the bond holder back the funds, they decide to invest, but with a certain percentage of interest added on top. So these are normally regarded as risk-free, or guaranteed, returns. Unless, and there is a caveat to that, unless the government or the actual company itself defaults on its liabilities. And that’s when, you know when we went through the European crisis, where there was a risk of the PIIGS, the companies, the countries within the European Union, were really struggling. They were on the verge of defaulting on their government debt and that would have meant that a lot of those bondholders wouldn’t have been able to have received their capital back. And certainly wouldn’t have been able to realize a particular profit or return on that investment. So there’s always a caveat to these things. So it’s important to bear that in mind as well. Now, obviously, the higher the perceived risk, the higher the interest rate or yield you would get from those particular bonds. So just going back to the European crisis once more, the interest rate on the ten-year bond in Greece during the crisis in 2012 was approximately 11%. While the interest rate on the ten-year bond from Germany was dramatically different – approximately 0.7 percent. Now these differences simply reflects the risks associated with trading those particular instruments. So the higher the yield, the higher the perceived risk. So that’s worth taking on board.

So to just explain this in a little bit more detail, what I’ve just taken is just a very brief snapshot in time of the interest rates which are offered by the US government. This is from the US Treasury’s website and it will tell you the actual rate of return that you will see. Depending on whether you are trading a 1-year bond, which ties up your capital for a whole year, and then at the end of that year you will receive the going percentage return at the point of that offering. So as you can see, you can trade short-term bond options, you can trade yearly, two-year, three-year, five-year bonds, seven-year, 10-year bonds.  And then you start going to the more longer-term which are largely more for, you know, your big files and institutions. Like your 10, 20, and 30-year bonds. And you can see that the rate of interest increases the longer you have your capital tied up in that bond offering. So the the marketplace actually dictates these particular prices, given the economic outlook for that particular region and the commercial outlook in general. And really, what the market is looking for is the propensity to repay. And if there’s a strong likelihood for like an economy like the US to continue to grow and strengthen over the longer term, then the more risk-free that particular trade becomes because the likelihood of the US defaulting on its debt is perceived to be very, very low. And which is why often, that these interest rates are also quite low as a result. Now obviously, the higher perceived risk, the higher the interest rate or yield you would get from those particular bonds. So that’s another thing to take on board.

Okay, so that’s just a very brief overview there of the bond markets. So moving on to the cryptocurrency markets. To give you a definition, this is a digital of virtual currency not issued by any central authority. So it’s very much decentralized. Rendering it theoretically immune to government interference or manipulation. And the key word there is theoretically. So it is very difficult to counterfeit because it is secure. Its security features and the anonymous nature of transactions enable it to be difficult to counterfeit. However, this very much can be a double-edged sword.

 And the reason for that is, obviously, if transactions are very much anonymous by their very nature, then they can also be used by, let’s say, entities, that are not so transparent. And there’s a dark aspect I guess to crypto currency markets as a result. And that’s obviously very, very worrying for your more established powers where they are subject to, well supposedly subject to, more transparent means. Although we’ve experienced over the last ten years that in actual fact, you know, the way that things currently stand, are not so transparent as they probably should be. However digital currency are tradable in some regions as a form of cash as well, so you can actually buy products and services with digital currencies. And the more that becomes accepted, the more opportunities that can bring for these whole, this large number of, cryptocurrencies which are currently out there now. They are tradable on private mining exchanges online, but they can now be entered as contracts of difference or future contracts as well as of December of 2017. So we do have institutions trading these markets as well, again, as of 2017, towards the end of 2017, December 2017. And these are tradable 24 hours a day, 7 days a week. Whereas your foreign exchange markets are tradable 24 hours a day, five days a week. So you can actually trade these over the weekend, as well. But they are very volatile trading conditions, given the products are relatively new to the market, and are not entirely understood by all of its participants.

A couple of final points to consider. Now, large percentages of the markets are owned by very, very few of what are called big players, so a large percentage of the markets are already owned by a small number of people. And they are very much driven by technological growth and prone to possible bubble X speculation. I’ll show you what I mean very, very shortly. They are not able to take short positions, as well, up until fairly recently on most of the available currencies, cryptocurrencies, which are available.

So they definitely have some downside, as well as some potential upside. And to show you the potential for technological growth and the possibility of bubble speculation, it can be very nicely summed up in this Bitcoin market. Right, as you can see, there was very little growth for a long period of time. This market saw a little spike in volatility around 2013. And then it sort of came back to this five, six hundred dollar level after reaching perhaps $1,000. But then we saw a bit of an explosive move towards the end of 2016. For those of you that are aware of what has effectively happened in the Bitcoin market, it topped out very close to the 20,000 level, which is an incredible period of growth. From between five and six hundred US dollars per Bitcoin right the way up to 20,000. So that is an incredible rate of growth in what is effectively 12 months of price action.

So this is what we’ve seen in 13 months. And it’s incredibly bubble-like. It’s for those traders that were quite happy to speculate on this market progressing to the upside. What we actually experienced, around this sort of price around here, was that these markets were then tradable on the future exchanges as well. And what we saw is a little bit of a push to the upside. And as you can see, an incredible reversal getting close to the $20,000 level. So this market, you know, experienced the best part of about 60 or 70 percent devaluation in a relatively short period of time. From December through to the end of January approximately, early February. But we’ve also seen, and this is a really good example of that bubble, seeing prices push higher, and what we’ve seen over the last few months is a complete devaluation of a market like this as well.

So you know people have very different ideas and expectations about your cryptocurrency markets. It’s very important to have a unique understanding about what impacts each and every cryptocurrency markets. And you know, the longer that these markets are tradable and the more access to price that you can establish, they’ll become a little bit more perhaps stabilized. I do say that with an air of caution because it’s hard to say that about a market which has seen such an explosive move in a relatively short period of time followed by a major devaluation.

So that’s just a little overview regarding the currency markets, a review of the six major asset classes, tradable asset classes, for us as traders.

So just to discuss a couple of points really around that, what we have is trade selection as well. So we have all of these markets that we can trade, but really what trade should we be looking to get into? A definition of trade selection is the strongly held belief or opinion to achieve a desired outcome. So deciding which trade should be taken is a very difficult decision, decision-making process, which can take time to master. It doesn’t necessarily come that easy. You have to sort of experience the markets and how they interact, and how they move over a period of time. 

Now, the more experienced and sophisticated investors out there trade what’s called diversified portfolios. And what these actually look to do is actively trade a combination of markets from a whole variety of different asset classes. So just a final point. This can be an extremely effective tool to assist traders manage downside risks. So embracing that principle of diversified portfolios is something that certainly your more established and more sophisticated traders will be looking to achieve. And to explain diversification in a little bit more detail and to give you again a very brief definition of what diversification is – pure and simply, it is a risk management technique that mixes a wide variety of investments or trades within a particular portfolio. So if we were to trade solely on one market we would then be completely exposed should that particular market or asset class fail to perform for a prolonged period. So we don’t want to put all of our eggs into one basket, so for that reason traders would typically attempt to trade a diversified portfolio. This could include trading markets from different asset classes. 

So we’ve just reviewed the six major asset classes which are available to us as traders. So it might mean we might have a couple of foreign exchange pairs, maybe a major pair, maybe a minor pair, maybe an exotic pair. For that matter, we might trade a couple of commodity markets, maybe an agricultural product, like corn, maybe a hard product, like gold. We might then decide to trade a US índice, and maybe a japanese indice. We might decide to trade a couple of global equities, maybe BMW in Europe. We might decide to trade the gilt in the UK, for example, if we’re talking about the UK bond. And finally, we might decide to trade a cryptocurrency as well, and there’s many, many to choose from. So that is the basic principle of diversification. 

So while attempting to diversify, we must be conscious of correlation among markets and asset classes. So what we mean by here is the EURUSD and the GBPUSD. And it’s funny how often traders trade EURUSD and the GBPUSD, not necessarily knowing they’re correlated in the way in which they are. Because they’re both trading against the US dollar. So, if the US dollar is strengthening on a particular trading day, then it will mean that the EURUSD and the GBPUSD will both move to the downside roughly at the same time if we’re getting some dollar strength. And the same applies if we start getting dollar weakness. So you’ll experience the GPBUSD and the EURUSD both moving to the upside if we’re experiencing dollar weakness, in this example. 

So it’s just very important that you are knowledgeable and you’re aware of this as a trader. That if they are correlated, they can react in a similar fashion. So effectively, what that means is you could be doubling up your potential gains, but you could also be doubling up your potential losses as well. Really knowing and understanding this, is what’s really important. So for example, the same thing applies to someone trading two indices, two US based indices, like the SP500 and the Dow Jones 30. Because they will react to similar situations more often than not. And, they’re correlated markets. And finally, like the gold market and the silver market. It doesn’t make too much sense to be trading both of these markets at the same time. Maybe just increase your size in one of them. And trade one, rather than trade two, correlated markets. 

Okay so that’s a little bit about diversification. So, just to conclude this webinar, let’s have a look at asset classes on a trading platform. We’re going to have a look at Metatrader 4 platform and so I shall get this up on screen right now. And what I want to draw your attention to is just on the right hand side of this screen. And in blue here, we can see your major currencies. And these are your dollar related trades. You have the dollar sitting on one of these sides and they’re all at, if you can notice, six letters. So the first three is the base currency. If we’re looking at the euro. And the second three is the quote currency. 

So if I just flick over to the EURUSD for example, and the current price in this market is the ‪23:23‬ currently, right now. So what that means for us if we decide to trade the EURUSD, is that we will see the quoted price of 1.2323 US dollars for each and every €1 that we trade. So that is the exchange rate. And that just applies across the board, different markets. But just focusing on the market watch, what you can do if you do trade metatrader4, and it’s the most commonly used platform out there, you can right-click on any market. And just make sure you Show All. What that will do is that will reveal all of the markets that you can trade. There’s also minors and exotic pairs in here on the currency side. This thing like the copper market. 

And as we scroll through, they’re all color coded. We also have your global indices as well, which can be traded. These, you have the dollar index, but you also have your equities, global equities like Apple and Amazon. And if you just hover over them, you’ll be able to see and understand exactly what market. You can look at a price action of each of these as well. So those are all your equities that you can trade on a contracts for difference. And there’s some more foreign exchange markets. And then you’ve got your, again, this is all colour-coded, you’ve got your commodity markets, natural gas, oil markets. The pound, sorry, excuse me, the gold markets, for example. Then you’ve got considerable, as you can see, there’s a vast number of different markets in there. You’ve got a lot of markets which are in there from various different jurisdictions globally. And then you will have access to loads of currency, cryptocurrency, markets as well. 

So that’s just a little overview about the different types of markets that you can access certainly on a Metatrader 4 platform, and there is many, many markets to choose from. Which is often what presents traders with significant issues, in terms of which markets they should be trading. 

So, that’s a little overview of the trading platform and what markets you can access. So as you can see, we’ve had a look, we’ve tried to define, asset classes. We’ve looked at the six different asset classes that are available to us as traders. The foreign exchange markets to commodity markets, the stock markets, the industry markets, the bond and the cryptocurrency markets as well. And just touched upon trade selection and diversification. 

So on that note, all that’s left for me to do now is to thank you very much for joining us, and we do look forward to seeing you all next time. Bye for now‬‬‬‬‬.

 

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