Moneyzine.com speaks exclusively to Chris Weston , Head of Research at Pepperstone - the Melbourne based broker providing access to financial instruments for consumers. In the interview we covered technological advancements in trading and investing, common mistakes that traders and investors make, along with risk management.
Moneyzine: What impact do you think recent global events, such as the pandemic and geopolitical tensions, have had on financial markets, and how do you see these events continuing to shape the industry moving forward?
Chris Weston: Recent events have, clearly, had a significant impact on the financial markets. No matter the event in question, the general impact on the market has been similar, namely a sharp and significant increase in economic uncertainty, sparking an equally sizable surge in market volatility.
Interestingly, the market reaction to the two events in question was vastly different – the ‘kitchen sink’ policy approach from central banks/governments upon the start of the pandemic allowed risk assets to roar back quickly. However, the stagflationary world that has started to take hold since Russia invaded Ukraine has resulted in a much rockier ride for risk assets, with ever-changing & tightening central bank policy resulting in structurally higher volatility, and stiffer headwinds for equities.
Going forward, such events reinforce the importance of risk management on the part of traders, given how markets remain liable to make significant moves with very little notice, and with unexpected headlines breaking on a regular, albeit unpredictable, basis.
Recognizing the market environment is also incredibly important for correctly deploying our strategy and managing the risks around this. This includes assessing whether we're seeing a trend day, or price action is choppy.
MZ: How do you approach risk management when working with clients, and what strategies do you recommend for minimising risk in the markets?
CW: We try to talk to clients about the inputs and relationships a market is most sensitive to. These correlations often change, but when we know what is important to market pricing, we can better prepare to navigate both known and unknown event risk.
This can help our assessment of whether the market sees a data release as a potential volatility event. And ultimately, it can help us make an informed call on whether to close, reduce, or even increase our position over news.
CFD and spread betting clients time in positions is typically ultra short-term. Depending on the market, traders are typically scalpers or day traders, although swing trading is popular with gold and index traders.
Recognizing the market environment is also incredibly important for correctly deploying our strategy and managing the risks around this. This includes assessing whether we're seeing a trend day, or price action is choppy.
Agility and remaining humble is key – meaning that it’s crucial to be able to change styles as the macro landscape shifts, and not become married to a particular view or trading method.
MZ: What are some of the most significant trends you are seeing in financial markets currently, and how are you advising your clients to navigate these trends?
CW: Throughout much of Q1, we witnessed an explosion in cross-asset volatility, although at the time of writing calmer conditions are being seen. The lagged effects of 2022’s rapid monetary policy tightening, which saw the Fed deliver the largest cumulative number of basis points bps increases since 1981 were felt – not only via tighter financial and credit conditions, but also as financial stability risks, rear their head amid a string of bank failures.
On top of that, rapid liquidity withdrawal as central banks embark on quantitative tightening programmes, as well as the death of the long-standing Fed put, also raise the bar for riskier assets to gain ground.
This, again, showed the importance of risk management in keeping you in the game. Knowing the instrument to trade, being aware of both the macro and micro influences on your chosen market, as well as the liquidity in the market, is pivotal to trading within the kind of volatility regime we are currently experiencing. These will allow traders to adjust their position sizing, as well as stop/take profit levels, as appropriate depending on prevailing conditions.
Agility and remaining humble is key – meaning that it’s crucial to be able to change styles as the macro landscape shifts, and not become married to a particular view or trading method.
MZ: What do you think the future holds for technological advancements in trading and investing?
CW: Over the past decade, we have witnessed how technological advancements have democratised financial markets by providing the ability to trade via the web and smartphone apps. There have been radical advancements in the ability to execute orders, as well as in the development of more sophisticated trading tools, the backtesting of strategies, and the simplification of automation.
This trend is only likely to continue in the coming years as the world moves on an increasingly digital footing, especially amid the growing middle classes in emerging markets.
Technological shifts also have an impact on how stories develop, not only in terms of the pace at which news spreads, but also in how quickly events play out.
Take Silicon Valley Bank, for instance; previously, a bank run may have taken days or weeks to play out. However with SVB, once news of the bank’s woes broke out, it was game over in a matter of hours as digital fund withdrawals sent the bank to the wall before the market opened the next day.
This heralds a new era for markets. Where previously stories would take time to develop and themes a while to play out, major events now happen in the ‘blink of an eye’, giving markets little, if any, time to reprice in any sort of orderly fashion.
MZ: How do you view the role of AI and machine learning in financial markets, and what opportunities and challenges do you see these technologies presenting for traders and investors?
CW: It seems too early to gauge the impact of AI on financial markets, given that Chat-GPT (and competing platforms) have only recently made their way onto the radar of the broad public.
However, AI and machine learning present plentiful opportunities for retail and institutional investors alike. Primarily, the ability to comb through reams of historical data to more efficiently backtest strategies and examine prior macro environments bring a range of different strategies within closer reach.
Furthermore, the increased proliferation of AI will likely result in more rudimentary and common tasks becoming automated. This will ultimately free up time to allow traders to focus on analysis, positioning, and managing risk exposures.
It seems like AI will play a huge role in building strategy, trading education, and automating systems. The main question is, should brokers open this up to all traders, and implement systematic ways to build this into their trading ecosystem? Or does this fall on the client? I can imagine all brokers are looking at Chat-GPT/AI very closely to assess how it can improve client outcomes.
MZ: What are some of the most common mistakes that traders and investors make, and how do you advise clients to avoid these pitfalls?
CW: Firstly, having a defined rules-based strategy is highly advantageous. It’ll help you have confidence to take on higher conviction trades and know when to stay out of the market, while reducing the emotion from the decision-making.
If you're going to trade a momentum or a trend-following strategy, then you should realise that you will likely have a low strike rate, and that to be expected. But this is not a great concern as the primary focus is on the reward to risk trade-off. So, we need to cut losses early and look at methods to stay in the trade and extract as much performance as possible.
The ability to let profits run is where so many retail (and pro traders) fail. The idea that you can “never go broke taking a profit” is one of the most misleading sayings in trading. You actually can go broke doing this very thing, as new traders often take massive losses and no one ever gets all of their trades right, every time!
I do, however, see a strong desire from clients to increasingly cut losers early. But where this often falls down is their ability to extract as much out of a trade as possible and ride winners. The mentality of always having to be right means traders take profits too early, especially after a run and it feels like the price is about to rollover.
If you are trading a mean reversion strategy, then you need to work out what indicators or quantitative data sets offer confidence that price has moved too extreme in one direction and is at the point of max stretch. Do you use a statistical mean, or just a simple visual portraying that price has moved far over a duration?
Using a defined strategy that sets expectations and utilises the correct indicators and price action is key. Once mastered, you'll find that there are actually advantages to running multiple trading systems concurrently. Diversification in one’s trading strategies can offer huge benefits
It seems like AI will play a huge role in building strategy, trading education, and automating systems. The main question is, should brokers open this up to all traders, and implement systematic ways to build this into their trading ecosystem? Or does this fall on the client? I can imagine all brokers are looking at Chat-GPT/AI very closely to assess how it can improve client outcomes.
Another classic mistake is failing to adjust to range expansion and price volatility. Markets trade an evolving macro theme that often results in a reduced ability to price risk. And the distribution of potential outcomes in both the data and central bank response radically widens.
This is the basis for increased market volatility and deteriorating liquidity. It's in this environment where a trader should look to take on more risk in the position, widening stops and subsequently taking down position sizing, and even one’s leverage. If EUR/USD is trading at 150 pip+ high-low range and the trader is utilising 500:1, there isn't much margin as a buffer in case the trade goes against you.
MZ: What do you think sets Pepperstone apart from other financial services providers, and how does your approach to research and analysis differ from your competitors?
CW: The bigger brokers all provide research, ideas, and event playbooks to clients to help manage risk and exposures. Regardless of how the broker manages client flow, the research teams should look for favourable client outcomes above everything.
Client retention is a core objective. Putting out unique and compelling content to help clients make informed decisions can greatly enhance the relationship between the client and broker. For us, trust is key. While helping clients make money is one aspect, offering insights that can help enhance their understanding of risk is also incredibly valuable.
MZ: Finally, what do you think the future holds for financial markets and the industry as a whole, and how is Pepperstone positioning itself to succeed in this changing landscape?
CW: Technology is the area that is moving at such a lightning pace – not just at an institutional level but at a retail level too. Traders want access to precision execution, deeper liquidity, and trading tools that they can work on and cultivate their age.
To keep pace, brokers are spending increasing sums of capital on progressing their trading platform(s) and their clients' connection with financial markets. There has been great investment in helping traders build robust strategies, progressively through the ease and accuracy of backtesting and automation.
Community and shared trading experiences also matter – as the markets evolve, learning from other like-minded, driven traders can really benefit traders of all experience levels.
The product range is important to capture market themes and trends, evolving flows and volatility regimes. Most brokers have addressed their product range, as they have with being highly competitive with costs.
But it is also important to be dynamic and responsive to trends in trader behaviours, needs and wants. We also look at continued advances in the speed and security of payments, and more importantly, the security of client funds and data – trust in a broker can take years, but it can be lost instantly.
