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Forex and Elections: Opportunity or Uncontrollable Risk?

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Forex and all other markets surge with volatility during the US elections. Many promote this event as an opportunity to earn quick money although, in the end, it is the promoter who wins in some way. Traders who have an understanding of how we approach uncontrollable risk coming out from election events know we choose to avoid rather than to bet. The plan we put in place for such occasions is adequate for those who follow our trading ways and systems, however, the tips we are about to present are for everyone. Traders should take these recommendations as they fit, they are just a part of one technical prop trader group researching an experience. One is certain, only when we have a plan or rulebook we also reduce the risk of completely busting our accounts during elections. In our case completely protected since such uncontrollable risk is avoided by simply not trading. We will tackle different markets where buy and hold strategies are applied and a plan for all major 8 currencies regarding elections or other significant events such as Brexit. 

Losing a major part of your hard and slow gains in just a few election days is also very discouraging for traders. But, as our prop traders used to say, you have a decision to make. Decide if you want to have control over your account or leave it to somebody else. By somebody else we mean the big banks, news, how people interpret the news, “experts”, and so on. Technical traders dislike fundamentals, everything out of their technical analysis is detrimental and a risk to change trends before they hit their first targets. Whatsmore, according to this trader group, fundamentals do not always drive the market in a logical way. Fundamentals info will just mess with your trading and this is very amplified during elections. We want as much control over our account as possible and for that we need caution some might consider as too conservative. However, now we are here for the steady long-term trading returns, and the election period does not deserve a chance to ruin that work. So instead of entering the storm and trying to drive through, we just stop and wait for it to pass. If we enter the storm we are leaving the majority of control to its mercy. 

Let’s start with the non-USD currency pairs plan. Elections are one of the biggest market disruptors but other events can also have a similar impact, like viruses, wars, or Brexit, for example. In all such scenarios stop trading all currency pairs that contain that country currency involved. So if New Zealand is having elections, stop trading all NZD pairs. Trades already going should be closed, be it on breakeven, in profit or loss. Stop trading 4 days prior to the event, and 4 days after. Still, if you see things are not calming down, consider waiting some more. 

USD currency pairs are largely dominated by the USD movements. If elections or other major events are related to the United States, shut down all of your trades, from all currency pairs. The avoidance plan also involves 4 plus 4 trading days (not weekends) before and after the event. Now you may wonder why this 4+4 plan. Well, before elections there is a lot of positioning by the big banks, investors, algo traders, and other market participants and prepare to enter the event. This may not shake the market as the election trading itself but still can shake our trades off the direction. You do not want to let others control the trends so you avoid them altogether. Hopefully, revenge trading is not your thing, especially during elections, it is an easy way to bust the account.

So this is why 4 days before the elections and of course, during the elections spreads are extreme, movements do not make any sense and you see some strategies to pop up how to trade this event on social media. These strategies do not follow any trends, in any timeframe because they do not exist. Extreme spikes can crush any predictions or trades you may have in a single candle. Four days after the election the markets exhibit reactionary price action or the shakeout. All this is uncontrollable, the big banks can force the move wherever they see fit and have the media to explain the move with whatever reason tied to elections. 

Market manipulation by these big players in the forex is very present during elections. Let’s take a look at the charts on election day in November 2016:

The ATR (14) value on a daily time frame on the day before the elections (candle marked by a yellow circle) was 65 pips. Election day candle moved down about 100 pips on this EUR/USD pair at price close. This movement pip value does not imply anything unusual. It is the spike that knocked out every possible Stop Loss levels in the emerging downtrend. The spike is about 275 pips on the upside and about 100 down to close the day. The price action like this reminds of flash crashes except this one is on election day we all know when it is going to happen. Interestingly, the price action does not make any deviations if we take into account the range from open to close. It is the intraday action that wreaks havoc. We use the daily timeframe for reasons already explained in previous articles so the indicators used in our algorithm structure do not get thrown off on this chart. But let’s get onto another currency pair without the USD – EUR/GBP.

The same US election day in 2016 is not the flash crash a few weeks before but the day marked in a yellow circle. Notice similar price action on this non-USD currency air, a Stop Loss spike to the up, and then candle close like normal. Flash crashes on the GBP might have thrown some indicators off to the point they are not reliable until they get normal values in balance. According to the ATR (14), volatility before the election day was 67 pips. The move down was about 120 pips and the spike up 121 pips. Even on cross pairs unrelated to the US elections, the big banks have a free pass to whipsaw Stop Losses. Exactly the reason why technical prop traders suggest shutting down all trades before and after US elections on all currency pairs. If we go far away from the USD and pick, for example, AUD/NZD, the situation is the same: 

The election day candle is marked in a yellow circle and has the same properties – with a big Stop Loss hunting wick. The day after has a long wick to the upside in case anyone went short. The next example is on the S&P 500 index, it is not only present on forex. 

Here we see a Stop Loss triggering with an extremely long wick for anyone in a long position on this emerging bullish trend. Even on a weekly timeframe, this push would trigger concentrated Stop Loss levels all traders considered to be at optimal positions. These pending orders were created before the election day since the markets were closed for trading. Traders could just observe how their far Stop Loss gets triggered only to return everything to normal before day close. It is logical to put Stop Loss orders some distance below the last candle lows, in case the equities market crashed. However, this scenario did not happen, yet traders took the loss as it had. The trend continued but without long positions in it. The avoidance plan protects traders from this risk if you are trading on daily and weekly charts. 

Understand that every election is different. This date is specific because Trump won the elections he was not supposed to. In previous elections, Obama was expected to win and he did without much drama. Chaos during the last elections was caused by several drivers and the one in 2020 is going to be for other reasons. If we get very big candle bodies during the next elections, depending on the system you have made, traders may need some time before the elements get back into nominal reading, maybe even more than our proposed 4 days. Accordingly, you will have to adapt to new conditions. Your ATR, confirmation, and volume indicators get out of normal reading consequently setting you money management out of optimal ranges. 250 to 350 pip candles during elections will definitely do this, since ATR is set to 14 periods, you may need to wait for a week to get into normal. Similarly to when flash crashes happen, the procedure is the same. 

These rules might test your patience if you have a habit to have more trades open. Patience will reward you, it is just 8 days out of the 4 years after all. Apart from the good setups for trading during the elections, you might be tempted to trade by social media too. The networks will be full of strategies on how to profit from the election’s hyper movements, causing the fear of missing out on many amateur traders. Prop traders have mastered how to manage feelings like this long ago, and you should follow despite what you read on social networks. This is not the long term game we play. 

Elections in 2020 are going to be very specific also because it seems the final results will be known several days after the election day. According to certain headlines, North Carolina is allowed by Federal court to accept mail-in ballots nine days after polls close. If the results are tight and these polls are decisive we will have chaotic price action on more than one day. How the big banks and investors will react to all this fundamental stimulus is unknown. So even a 4 plus 4 days plan might not be enough since every election is different. Technical traders will have to pay attention to fundamentals too now, adapt to the specifics of every election. After all calms down, usual trading may resume. 

Twitter is a good source to follow like-minded investors who do not involve election trading. If you are not really well informed or follow headlines, follow people that are. Tweeter has several groups that know about the risks and are well informed fundamentally. YouTube can be a second source although you will have to dig through the more popular all-in election trading top lists. 

In other markets, precious metals, oil, crypto, and the like, most of the assets are expressed in the USD, meaning the same avoidance plan applies to them too. However, you may wonder should you make any adjustments to buy and hold strategies investors usually apply to precious metals and crypto. These strategies have such long term goals elections are just an abysmally small period and volatility spark does not affect them at all. If you are true to your buy and hold strategy, you are not going to change anything, elections will be a temptation. These strategies should be designed to last for years. Do not try to make sense to invest more into gold or crypto during elections, chaotic periods logically should drive these safe assets higher, but elections moves do not follow any logic.

If for some reason gold or other non-fiat safe heavens drop more than 10% in the coming weeks, this is actually a good time to average down, look to buy more of these assets as they are likely setting up for a long-term bull rally. Averaging is not something you do in forex trading, however, long term strategies like buy and hold are very good for averaging down. Of course, this is just an opinion from prop traders who are into investing, you can do whatever you want. As a general tip for elections, stay out of trading with a plan, be patient, and know every election is different. Forget what social networks and portals are saying, stay patient, and prudent in your investing. The long game result will prove you are right even if it does not seem so at the moment.

 

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