Long time no speak! Apologies we have been so absent on the blogs lately but as you will have no doubt seen, it’s been quite a busy few months in the financial markets! None more so than this month with the huge US election very much front of trader’s minds and unless you have been living under a rock or on a desert island you will be fully aware that we saw a shock Donald Trump victory. Whether you like him or loathe him, from a trading perspective it matters very little as we must take a step back from our political views and see it all through the eyes of the market and boy did the past few weeks and days deliver some incredible moves across all asset classes, not just forex.
This is just another in a long line of huge events that have rocked the markets this year (just take a look through our 2016 YouTube videos HERE) and so, being predominantly news based traders, we are going to be a little sad when 2016 comes to an end! A year that will no doubt go down in the economic history books.
That said, there will be many more to come and so today’s blog is aimed at helping prepare you for future major market moving events so that you have the tools and confidence to take full advantage when they do so. Markets react in very similar ways to events of this scale and magnitude and although the event type will change, the market reaction very rarely does so by running through today’s US election example you will have a much better understanding of how to respond to similar scale events in the future by following three simple but highly effective steps.
STEP 1 – Look at the event through the eyes of the market, not your own!
As a retail trader it is absolutely essential that you take a step back from your own personal opinion towards an event and see it through the eyes of the large scale market participants i.e. commercial banks. We want and need to know how they are likely to respond to each possible outcome so that we can ultimately piggy back their reaction to it. If you let your own personal views take over, such as your like or dislike towards a certain election candidate, it can cloud your logical trading judgement and prove detrimental. Instead look at things independently and see which way the market is likely to react in either scenario/outcome. Thankfully for most events there are normally only two ways a market can react and so our job is to know what they are and, more specifically, how they impact certain currencies. The great thing is that we can do this very easily by simply keeping abreast of the free daily news feeds/squawk.
Relating this specifically to the US election this week, the market was highly likely to react more favourably to a Clinton victory than a Trump win. Why? Well it all comes down to certainty. With Clinton, you have a more certain outcome. A ‘business as usual’ type outcome given her political background/experience whilst in Trump you have a candidate who brings controversial plans to the table as well as limited political experience. As such there are many more unknowns with Trump and with so many unknowns come much greater uncertainty and worry.
Through knowing the likely market reaction to each outcome, you can then put the next piece of the puzzle in place and that is to understand how the reaction will impact certain assets.
With uncertainty, i.e. a Trump victory, comes an increased likelihood for market fear and panic and more of a ‘risk off’ environment to ensue. This would generally result in less confidence to buy the local currency i.e. USD, and decrease risk appetite. As such we would expect risk based assets (Stocks, commodities and commodity linked currencies such as the AUD, CAD and NZD) to suffer/weaken and safe havens such as gold, JPY, CHF and EUR to strengthen as money flows into them during a time of uncertainty.
On the flip side of this, with certainty comes confidence to buy/strengthen the local currency i.e. USD and increase risk appetite. As such we would expect more of a risk on environment to kick in and for the risk based assets (Stocks, commodities and commodity linked currencies such as the AUD, CAD and NZD) to strengthen. We would also expect the weaker ‘safe haven’ assets of gold, JPY, CHF and EUR to weaken as demand for them drops.
One important element of knowing the above ramifications, from a trading perspective, is it helps one to identify a number of weak currencies and a number of strong currencies to pair against one another. As you will have seen in previous blogs, pairing a strong currency against a weaker one (or vice versa), is our number one requirement when taking a trade. It helps you determine the best currency pairs to trade AND the direction to trade them in for the highest probability of success.
Let’s powerfully illustrate what we mean by this. Let’s take ourselves back to Friday 28th October, two weeks before the election result was announced, where the market received some breaking news that the FBI had re-opened an old investigation into Hillary Clinton storing politically sensitive emails on a private server, amid new evidence. Essentially we don’t need to know the ins and outs of the investigation, more the impact that it would have on the election campaign. It’s not rocket science to know that it would help Trump and hinder Clinton and this was reflected in the ensuing polls which illustrated Trump getting traction. Cue the market reaction – uncertainty, fear and a little panic. In the hours and days that followed, stocks got hit, so did the USD and the riskier based commodity linked currencies. In contrast the likes of the JPY, EUR and CHF saw strength as fear pushed money out of risk and into safe havens. Understandably the likes of USDJPY fell due to the weaker USD being comfortably overpowered by the stronger JPY.
Then, on Sunday 6th November, the mood changed. Now we had breaking news from the FBI confirming that they had closed the Clinton case amid the new evidence providing no reason to explore the matter further. This of course helped Clinton’s campaign and hindered Trumps with the opposite reactions across financial markets being seen. Stocks rallied, as did the USD and other risk based currencies and the safe havens softened i.e. weakened. Understandably, the USDJPY pair, as a consistent way to illustrate our point, headed sharply higher as the USD was now the much stronger player in the pairing. CLICK HERE to see how we traded it.
Also, if you don’t quite know what we mean by a ‘risk on’ or ‘risk off’ environment please check out the following video by CLICKING HERE.
STEP 2 – Ensure you keep track of market ‘expectations’
What the FBI investigations did do was swing the markets ‘expectations’ of the likely outcome of the election. First we saw Trump in the lead as the FBI re-opened the case but then Clinton fought back strongly when the case was closed just two days before votes were placed and the 45th US President was known. In hindsight, these events mattered very little but at the time they mattered a great deal to the market and this stresses the importance of ‘tuning in’ to the news feeds to keep abreast of the fundamental drivers which are likely to affect the currencies we are trading. If we don’t it’s like driving a car with both eyes closed – dangerous.
Leading into any major event, there will be regular updates on what outcome is most likely. This normally comes via polls which are released via the free news feeds/squawk so it is very easy to get a feel for them, you just need to put in a little time to do so. As highlighted above, these can prove to be very powerful catalysts to trade from but the real opportunity comes when the actual results start to come in.
In the hours leading into the final results, all polls were pointed to a Clinton victory with a near 80% market probability. As such it was no surprise to see the positive vibes continue across stock markets, the USD and risk based currencies such as the AUD but this was simply based on ‘expectation’ and not ‘reality’ but as you will read below, both are vital ingredients. This is because, with knowledge of the expectation, you can then see where the greatest opportunity lies – on a major deviation/shock (see below).
STEP 3 – Trade any major deviation from the expected
As you will have seen in the innumerable trade videos we have posted, the best moves always come when there is a major deviation from the market consensus/expectation, be that a major election result, statistical economic data or central bank comment. The main reason for this is that the market will ‘re-price’ this expectation.
Coming into Wednesday’s election result, the market had priced in an 80% chance of a Clinton win so had she won, the market reaction would not have been overly severe. The best trading opportunity/market movement was going to come from a shock Trump win as all the initial moves reverse.
And so it was, as the night unfolded and Trump started to get some traction in the key ‘swing states’ such as Florida, the market understandably responded. They got a whiff of a Trump victory and all that uncertainty, fear and panic started to kick back in again amidst the expectation shifting from an 80% Clinton win to a 94% Trump win. A complete swing in market view and thus cue the risk off sentiment kicking in and all the expected reverberations (discussed above) across financial markets.
How we planned for it?
It’s important to us that we show you that we planned for this event well in advance and how our preference, from a purely trading perspective, was a Trump victory as this was likely to offer the greatest profit potential. So below you will see an extract from our ‘evening report’ sent to our clients on Tuesday night, well in advance of the election results coming in. This highlights what we expected to happen so that we could prepare well in advance and take advantage as soon as the shock started to become the more likely option.
How we traded it?
As we now know, the shock Trump victory did come to fruition and the moves we expected in certain currency pairs more than delivered the goods/pips. In the video below you will see how we traded the market reaction and our thought process at the time which will strongly reinforce everything we have discussed in this blog post:
And here are a couple of our clients who we are delighted to see do even better:
I hope you are recovering well after last night fireworks.
I don’t normally do this but I thought I share my last night experience as it was absolutely exceptional.
I have focused on selling CADJPY and AUDJPY and buying EURCAD and managed to get 600+ pips getting in and out and taking chunks of the ride
It’s all thanks to you!!!
Just want you to know how grateful I am for your input into my trading.
I traded and got more than 300+ pips, based on Trump lead in election.
It wont be possible without your guidance and learning insights about news trading.
Spooky similarities to the Brexit!
For those of you who haven’t seen our Brexit blog please CLICK HERE. You will be surprised to see just how similar the two events played out. In the hours that led up to the referendum votes coming in, the market expectation was held heavily towards a ‘remain’ vote which was the more certain outcome. With that we saw the GBP well supported and an overall calm market mood.
This of course opened up an incredible trading opportunity when the ‘leave’ camp started to gain traction in the race and as we saw, go on to win. The GBP got hammered but more so given the fact that the markets expectations were not matched with the reality and the market had to re-price its earlier moves. It was this re-pricing that we ultimately traded, banking some very nice pips in the process.
So these huge events, that gain world-wide focus, may not come around that often but are more regular than you may think.
We must say that 2016 has been unusually fruitful in terms of major news events. That said, we know that there will be plenty more to take advantage of as we head into and throughout 2017. What the election and Brexit show is that you don’t have to spend too much time trading to generate a nice profit. Instead its more about focusing on the news events that hold the greatest potential for a large move and when they do, taking full advantage.
We hope that you have found the article interesting and more importantly useful. With our diary continuing to remain on the busy side our blogs are going to remain very infrequent but that said we only ever want to deliver quantity over quality with material that you can take away and implement into your trading going forward. The learnings from today are not just effective for the largest world events, you can also apply this approach to the more frequent economic/statistical events too.
Prosperous trading until we speak next!
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