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How to Trade a Political Forex Market
I wrote this article six years ago and it is still relevant in today’s forex market, especially in the current politically driven GBP currency.
I define a “political market” as one that is being driven by events other than economic and monetary policy. Some may call it crisis trading but I prefer the term “political markets” as it covers positive as well as negative events although the latter tends to be the more dominant. Political markets can see some significant forex market and other global markets moves so the question is how do you trade them?
How to Trade Political Markets
To keep it simple, the answer is to go with the flow but DON’T OVERSTAY YOUR WELCOME. This means don’t hold out for the last pip for when the focus shifts, the reaction can be swift. One reason for this is a tendency to factor in the worst case basis and then back off when the worst does not materialize. In my many years of trading, I have found that most politically driven markets tend to have short shelf lives. Either the worst case does not materialize, a crisis is averted or the market becomes immune to the news. It then tends to lose its importance as the focus reverts back to underlying fundamentals. There are exceptions (check your history books and read about the Plaza Accord in 1985) when an event causes a fundamental shift but for the most part, political markets have a limited duration. A "political market" needs a continuous flow of news to keep risk elevated.
Beware of the Turn
In political markets, the key is to figure out what currencies are safe havens and which ones suffer from a flight to safety. It does not pay to stand in front of these flows as they do not care more about protection of capital than any technical levels or indicators (although technical can exacerbate the moves). However, once the doomsday scenario gets factored in, markets tend to find a bottom or top. This is where you need to be careful. It is easy to be caught the wrong way fighting the last battle. What I mean by this is it easy to keep trading as it is still a political market when the market has discounted the worst case and is starting to look for the light at the end of the tunnel. In this case, BEWARE of the TURN and use technicals to tell you if the market focus is changing.
For those who have access to our Strategy Guide, note how it describes the forex market as trading in episodes and it will be clear why I say don’t overstay your welcome.
A lesson to be learned
The lesson to be learned is you can go with the flow but be aware when sentiment changes don’t overstay your welcome. In this case, the unwinding of positions plus new positioning can overwhelm liquidity and lead to a sharp reaction the other way. When a political market reverses, don’t treat it as a typical technical reaction/correction and look for where there may be stops as that is what will attract the algos to squeeze out those still trading the “old” episode. See the forex forum post shown above as it covers the current two-way “political” risk in the GBP.
The best way I have found to get on the right side with the flow, including in political markets and trade the forex market is using the Amazing Trader with a strategy designed to have you trading with what we see as the odds on your side using the AT Ladder Strategy,
Jay Meisler, co- founder
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