People across all generations aspire to achieve long-term financial objectives. A detailed financial plan serves as a roadmap to realize these goals, providing a thorough analysis of one’s current financial status and outlining strategies for growth.
When it comes to growing wealth, trading is one option to consider as part of your overall financial plan. While trading can be risky and may not always align with traditional long-term saving strategies, it can be a useful tool if done carefully. This article explores how trading and technology can benefit your financial plan.
The Growing Importance of Trading in Financial Planning
Historically, financial planners have focused on long-term investing. While such an approach is necessary, trading can fill in some gaps. One disadvantage of traditional investing is liquidity constraints.
Usually, one owns certain assets in their actual form (e.g., commodities) but faces an uphill battle when trying to sell them. Meanwhile, trading is more flexible, as you can liquidate your positions at a much faster rate since the trader owns a derived form of the asset.
Part of a financial plan is to account for emergencies. Trading can be beneficial during times of financial stress due to its flexibility, allowing one to enter and exit the markets at will.
Traditional investing also brings greater uncertainty. Investors must be quite patient, especially during volatile or difficult periods where they must withstand seeing their investments at running losses. On the other hand, having a trading strategy eliminates much of the uncertainty due to the shorter horizon that positions are held.
Overall, any financial plan can be strengthened by some aspect of trading despite some of its drawbacks.
How Does Trading Fit into A Comprehensive Financial Plan?
As the term suggests, a comprehensive financial plan is a detailed approach with several layers. One of these is, of course, investment management. The first question one needs to ask themselves should revolve around risk tolerance (willingness to take on risk) and risk capacity (how far someone can endure losses).
With this information, one can determine the best markets to trade. Traders have the luxury of choosing several assets, allocating different parts of their capital, and deciding on the best time horizons that offer the highest potential.
Generally, markets like forex and cryptocurrencies are the most volatile but may suit less risk-tolerant individuals. On the other hand, assets like ETFs (exchange-traded funds) move less erratically.
Once a risk profile is known, asset allocation can begin. Most online trading brokers simplify this process by offering multiple derivatives. Based on the risk profile, traders can divide their disposable capital across their preferred markets.
Balancing Trading with Long-Term Financial Stability
Despite the allure of trading, risk management is crucial for stability in the long run.
The first pillar in this regard is the ‘one percent rule.’ This simply refers to allocating 1% of your account on any trade and no more. The idea is that this allows a trader to withstand a string of losses and still have a significant balance remaining.
Even with such conservative allocation, it’s crucial to manage correlations, which is where diversifying may prove useful. It’s the cliched yet truthful statement of ‘never put all your eggs in one basket.’ Such a method means traders minimize the impact of a single market’s underperformance on their entire portfolio.
Another consideration for traders in risk management is using the right amount of leverage. Even those with a higher risk appetite should always ensure they don’t over-leverage, as this can derail their trading and overall financial planning progress.
Finally, traders should always maintain a good risk-to-reward ratio. Experts generally recommend a minimum of 1:2, meaning that one profits twice the amount they’ve risked. However, the more favorable the ratio, the more profitable a trader becomes.
This requires thoughtful planning and a skillful understanding of the markets while also effectively balancing risk. Yet, an above-average risk-reward ratio accelerates long-term financial stability by ensuring profitable traders are large enough to cover the losses.
Tools and Platforms for Smarter Trading Decisions
Navigating the online trading industry nowadays has been simplified thanks to technology.
Platforms like the TradingView app are the gold standard for software that covers all financial markets and investing websites frequented by millions globally.
Another technological component of modern trading is the use of a squawk service. By monitoring data releases and global events, these tools provide the most impactful audio news headlines for various asset classes in real-time.
While an emerging trend, artificial intelligence is expected to become more crucial over time. Traders will eventually benefit from more advanced automated strategies, higher-frequency trading, and better predictive analysis.
Market Evolution Will Shape Financial Planning Strategies
Modern times have made it possible for financial planning to include an element of trading beyond conventional investing. This provides several liquidity and flexible advantages while keeping one grounded in their goals.
Markets continually evolve, introducing novel trading methods to offer more monetary opportunities. Although it is enticing to shift with the winds, it’s still key for any financial planning strategy to remain true to its original purpose to maintain long-term stability.
