How To Trade The American Election (as a Forex trader)
A few months ago, I wrote an article about Brexit titled Everything You Need To Know About Brexit (as a Forex trader). That was a way to provide with a clear view of the political event and how I was expecting to trade following it.
Last week, I got a call from a fellow trader (this guy), the same who encouraged me to write about Brexit. This time, he mentioned the American elections and how that might affect the Foreign Exchange Market.
“Sure, I’ll write about it”, I told him.
And here we are… How to trade the American election.
Now, I want to make something clear, I am not a fundamental trader. I use primarily technical analysis, but when large-scale events like Brexit or the American elections, my interest gets peaked by how the Forex market will be affected.
What’s more interesting is that the effects of such events can be felt on a technical analysis level. Strong price reactions often come with uncertainty or traders’ reactions to what is said by politicians.
The impact can be seen in real time.
Through this article, I will detail what has happened recently, potentially due to the ongoing American election. Note well that the elections aren’t over yet at the time of writing this and that further reactions may take place in the near future.
The last section of this article will discuss trading opportunities and how I decided to “trade the American election” today.
How To Trade The American Election
On Monday September 26th, a first debate took place between the two candidate running for the White House. The debate started at 9:00pm EST.
In the first couple of minutes of the debate, Donal Trump, the republican deputy got asked how he planned to help the American economy. His answer was contained the following:
“So we’re losing our good jobs, so many of them. When you look at what’s happening in Mexico, a friend of mine who builds plants said it’s the eighth wonder of the world. They’re building some of the biggest plants anywhere in the world, some of the most sophisticated, some of the best plants. With the United States, as he said, not so much. ” (Source: The Washington Post)
The Debate’s Immediate Reaction On The Forex Market
If I were a fundamentalist trader, I might want to carefully analyze what Mr. Trump said.
As a technical Forex trader, however, I expect charts to accurately describe the relationship between the buyers and the sellers. That’s all what’s counts, simple right?
That being said, Mr. Trump mentioned Mexico and United States in his response.
Prior to the debate, here’s what the USD/MXN (U.S. Dollar against the Mexican Peso) chart looked like:
A few days earlier, the exchange rate of USD/MXN hit an all-time high and was about to retest the same high prior to the debate.
What I want you to notice is the candlestick that formed starting at 9:00pm EST (the start of the debate):
Bear in mind that they weren’t any economic news released at 9:00pm EST in the United States nor in Mexico.
I therefore assume that this reaction from traders and investors was mainly caused by the first American Presidential Debate.
Should I trade with those guys? Is this reaction appropriate?
By looking at the reaction caused by the debate, most beginning traders feel that they have to get in or they might miss out on the trade. Some other traders might want to know precisely why the price dropped as much in a short period of time.
In the first case, I want to point out that this is only the initial reaction. No one knows whether it will be sustained by traders in the near future.
In the second case, knowing the precise reason why price dropped isn’t important. All we know is that the sellers of the U.S. Dollar are more aggressive than the buyers. One thing we must remind ourselves is that every single transaction involves a buyer and a seller. The movement is caused by who is more agressive (i.e. requesting more) than the other.
Two Political Views, Two Possible Directions
The majority of Forex traders out in the world rarely ever trade what they see. Instead, they go on to trade based on their expectations future events.
If they expect the upcoming government to invest in the U.S. economy, for instance, a good part of those traders would go ahead and buy the U.S. Dollar. Source: FXCM
In my experience, traders’ reaction isn’t as clear…
However, you can expect to see an uncertain market or a strong move prior to an election as traders trade their expectations.
A Possible Republican Government
As a brief background, Republicans are usually more focused on the American economy and discuss job creation, American business profitability, etc.
Traders expecting a Republican government might want to buy the U.S. Dollar as a lower unemployment rate and greater GDP are likely to drive the U.S. Dollar higher (applying some fundamentals here..).
In 2014, the mid-term elections in the United States carried the possibility of having a Republican government taking over the Senate.
Here’s an example of news headlines that could be found:
In the days preceding the election on November 4th, 2014, the USD/CAD, among other pairs, made a record high. While I wouldn't argue this election was the only reason for the up move, I'm sure several traders entered the market on their post-election expectations.
How I Trade The American Election
To me, entering a trade solely based on American elections or the first Presidential Debate wouldn't make sense. After all, I believe that my job as a Forex trader is to build confluence, not to enter the market on news.
Even though the reaction to the Presidential debate was only the first reaction, I decided to enter the market anyway on a reduced position size.
As price made an all-time high, it also formed a strong Bearish Engulfing Pattern on the weekly chart. This pattern coincide with one of my favorite trade setup: the Bollinger Bands Reversal.
Here's what it looks like:
Why A Reduced Position Size?
Remember, right? I mentioned the fact that no one knows at the time of writing this article whether or not the initial reaction on USD/MXN will be sustained.
A signal like this for me means that the probability of this trade working out is slightly lower than for my other trades. However, it provides me with a much better entry point.
I intend to add to this trade on a trend continuation basis, that is if price creates a lower low on the weekly chart and provides a retraced entry opportunity.
I wouldn't trade American elections blindly.
However when combined with technical analysis, trade opportunities can arise.
The second part of planning a trade also involves selecting the right currency pair. Bigger reactions could be expected on USD/MXN as Mexico has been a topic of discussion lately, especially by Donald Trump. That was therefore my preferred way to trade the American election.
Who know how my trade will work out. As of publishing this article, I'm still in the trade and intend to update this article as things move on.
Don't just jump in though...
I do want to remind you that what truly counts is your plan, not the outcome of a trade.
Have you considered to trade the American Election? What is one thing you got out of this article that was useful? Comment below and let's chat!