What is trading

Trading is a demanding discipline. And to truly excel in this discipline, it’s necessary to master four essential pillars for successful trading. They are complementary: analysis, execution, risk management, and psychology. When observing novice traders, we often notice that they focus on a single aspect, such as technical analysis, while neglecting the other pillars essential to their success.

However, to perform well in the markets, we must adopt a comprehensive approach that integrates fundamental analysis, technical analysis, efficient trade execution, and, above all, management of our own psychology.

In this article, we’ll explore these four fundamental pillars, enriched with real-life cases and practical examples, to help you turn your knowledge into concrete actions. Whether you’re a beginner or already experienced, this guide will help you structure your trading decisions and progress toward a sustainable and profitable strategy.

Fundamental analysis

Fundamental analysis assesses the intrinsic value of an asset based on economic or geopolitical data. Unlike technical analysis, which focuses on price movements, fundamental analysis explores the external causes of market fluctuations.

Traders using this approach look at key indicators. These indicators might include interest rates, inflation data, or central bank monetary policy. Federal Reserve (Fed) tends to strengthen the U.S. dollar.

The economic calendar is an essential tool for any trader who uses fundamental analysis. It lists major economic events likely to influence the markets, such as:

Let’s take a concrete example that you’ll likely encounter during your trading sessions. When a jobs report reveals higher-than-expected job creation, this can lead to a rise in stock indices. This also reflects a strong economy (more jobs = more purchasing power = more spending). In trading, it’s essential to pay attention to these types of risk events. They can have a significant impact and lead to significant market movements (volatility).

The concept of Risk On/Risk Off is fundamental in trading because it reflects investors’ mindset regarding market risks. It describes periods when capital moves between “risky” assets like stocks and “safe haven” assets like gold or government bonds. These movements depend on economic, political, and social outlooks.

Risk On: Investors seek risk

In a Risk-On environment, investors have confidence in the stability and growth of the economy. They become risk-averse and invest their funds in risky, but potentially more profitable, assets.

Here is a list of risky assets that perform well in Risk On environments:

Stocks: Particularly those in cyclical sectors such as technology or consumer discretionary.

Emerging currencies: For example, the South African rand (ZAR) or the Mexican peso (MXN), which generally offer higher returns.

Cyclical commodities: Such as oil or copper, which are heavily dependent on global industrial demand.

Risk-on phases are often associated with rising stock markets and declining volatility (often measured by the VIX, the volatility index, also known as the “fear index”). They also involve a move away from safe-haven assets.

Conversely, during a risk-off period, investors become risk-averse due to uncertain economic or geopolitical conditions. They then turn to safer assets to preserve their capital, often referred to as safe-haven assets.

Risk-off periods are characterized by increased volatility (a rise in the VIX index), a decline in stock indices, and an appreciation of safe-haven assets. Triggers include negative news events, such as an impending recession, geopolitical tensions, or a health crisis.