Have you ever reacted to political related events when trading futures by suddenly exiting your position? Reacting due to fear could cause you to lose focus and stray from a carefully thought out plan. From Presidential and Congressional elections to laws passing through Congress, political events can affect in seconds what you spent hours thinking out. Avoiding knee-jerk reactions is key to avoiding an unplanned exit from your position or entering a new position.
A good example of a political event influencing the market can be seen below on a chart of the S&P 500 Futures Contract (ES) after the 2016 US Presidential election:
Some additional potential examples of political events potentially affecting the markets are:
- A bill passes through Congress that increases taxes for a majority of S&P 500 companies could result in a sudden decrease in S&P 500 Futures Contract (ES) value.
- An unexpected result in an election that is beneficial to a candidate who is pro oil drilling could result in a sudden decrease in WTI Crude Oil (CL) price due to a potential surplus in oil reserves.
- An unexpected vote by a country to leave the European Union could result in a sudden change in the value of a country’s currency
Reacting by Not Reacting
To be clear, reacting to political events does not necessarily mean you should immediately jump back into the market after an unplanned exit by taking the opposite position. Nor does it mean you should stay in your position as the market goes the other way. Both of the above are still ‘knee jerk’ reactions to what might be a sudden move by the market.
Exiting Trades in Advance
If you are aware a political event is scheduled in the near future, one strategy could be to exit your position(s). Commonly referred to as ‘punting’, the thought behind this approach is that by exiting the market, you avoid the potential unexpected swing in the market/s you are trading.
Use Stops to Help Manage Risk
By having an exit plan in place before entering a trade, you can prepare and help to protect your account from an unexpected outcome of political event and the possible market fallout. This could involve executing a series of stop orders which allows you to reduce the role of emotions in your trade management. Below are three examples of stop orders:
- A stop-limit order executes once a financial instrument’s price reaches or exceeds the ‘stop level’ set in your online trading platform The ‘stop’ turns into a limit order and fills once the market arrives at your ‘stop’ price.
- A trailing-stop sell or buy order adjusts based on the difference between the price level when set at a percentage or dollar amount above or below trade price.
- A stop-market order turns into a market order once a pre-set price level above or below current market value is reached.
It important to note that stop orders are not guaranteed to protect a position. The market may move too quickly for a stop order to execute or fill. As always, please remain aware that there is risk associated with trading futures online.
Keep Calm and Trade On
When faced with an unplanned political event, it is important to keep calm and breath. If you have incorporated risk management principles into your trading strategy such as stop orders, you can rest a bit easier knowing that you have some precautions in place.
As always, remember past performance is not indicative of future results and you should always trade within your risk tolerance levels.
As an award-wining futures broker, NinjaTrader provides deep discount commissions and unmatched support. Download NinjaTrader free today to start building your free strategies accounting for political influence!