How to trade during the US election 2020
The US presidential election, which is held in the first week of November every four years, is less than 90 days away.
18th August 2020
For traders, the US election presents a unique trading opportunity, based on historical data and patterns seen in previous presidential elections. In this article, we will discuss the steps to create a trading system and discuss specific strategies for the 2020 US election.
How to create a trading strategy
A clearly defined trading strategy can be a trader’s best friend. There’s no one-size-fits-all, perfect trading method because everybody has different goals and tolerance for risk. However, when it comes to trading, there are some key steps to keep in mind that are important for designing a viable strategy:
1. Time frame
Your first step is to determine what type of trader you want to be: are you interested in day trading, or are you willing to hold an open position for days or even weeks? Once you’ve established your time frame, you can then decide which indicators are useful and relevant to your trades and incorporate them into your strategy.
When read correctly, certain trading indicators can signal a price change in the market, so invest the time properly learning the key triggers associated with the election. For example, while traders must keep a close eye on the up-to-the-minute polling results as the presidential race comes to an end, it’s also important to monitor the market movements as the results are coming out. A drop in US treasury yields and stock indices, for example, could be a proxy for market nervousness if the result is potentially close. Meanwhile, price increases for precious metals may also be a good proxy to safe-haven flows. By becoming familiar with the relevant market indicators, you’ll be better equipped to “read” the markets and make educated trading decisions during the election.
3. Determine your risk tolerance
All traders take a position based on the assumption it will be profitable; however, it’s important to remember that you will inevitably experience both wins and losses at some point. That’s why experienced traders diversify their portfolio, never risking their entire capital on one particular trade and choosing instead to hedge their positions in order to offset any potential losses. However, risk tolerance varies between individuals, so you need to determine the level of exposure you are comfortable with and hedge accordingly to protect your assets. As a rule of thumb, if your stomach is in knots or you’re losing sleep over your trades, then it’s time to reduce the risk in your trading strategy. Also remember, prudent risk management is vital during times of heightened volatility.
4. Define entries and exits
Traders often want to know the optimal time to enter and exit the markets. There’s no magic answer, of course; however, as your understanding of trading improves, you will learn to identify potential entry and exit points. It’s also wise to test your strategy on a demo account first and potentially backtest, in order to identify those entry and exit points that work best for you. Of course, even this doesn’t guarantee your strategy will always work in the future, which is why you must continually monitor and improve.
5. Follow your plan
While it’s important that you conduct research and analysis as part of your trading strategy, this homework must also be translated into an effective plan of action. Make sure you write down your plan because this will help you follow the trading strategies you’ve developed.
6. Improvise when needed
You have worked hard on designing a trading strategy, but at the same time, it’s important to be flexible. As you gain trading experience, you will be able to determine which parts of your strategy are working and which could use improvement. Take notes of your market observations and record your trades. If your strategy isn’t working out, try to make improvements as needed. Much like every other trader, you’re never going to win every time, so it’s important to adapt and adjust your strategy accordingly.
With Biden bound for the White House, how will you trade?
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Identifying trading opportunities
In order to take advantage of any market volatility caused by the US election, it’s essential to remain nimble from a trading perspective. For example, some traders will lighten their positions as the campaign progresses in order to allow room for short-term trades in their portfolio, while others will be focused on uncorrelated assets and traditional safe havens such as gold and silver that help hedge against risk. Be prepared for possible rallies in German bunds and Japanese government bonds as well as sell-offs in emerging FX, especially the Mexican peso and offshore Chinese yuan should the result look close. High beta currencies to China such as the Australian dollar and the New Zealand dollar may also be sold.
Disclaimer: This article is for general information purposes only and does not take into account your personal circumstances. This is not investment advice or an inducement to trade. The information shared is for illustrative purposes only and may not reflect current prices or offers from OANDA. Clients are solely responsible for determining whether trading or a particular transaction is suitable. We recommend you seek independent financial advice and ensure you fully understand the risks involved before trading. Leveraged trading is high risk and not suitable for all. Losses can exceed investments. Opinions are the authors; not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors.
Market Analyst, OANDA
A highly experienced financial market analyst with a focus on fundamental analysis, Kenneth covers a broad range of markets including forex, equities and commodities. Based in Israel, his work has been published in Seeking Alpha, FXStreet and Investing.com.