It’s no secret that the political situation in the United States is as contentious as ever. Many people, with all ranges of political ideology, have been stressing out over the COVID19 pandemic, then the subsequent racial issues, and, more recently, the Supreme Court nomination and confirmation process. It creates a perfect storm of interest heading into Tuesday’s election.
As traders, we are often opinionated, confident, and assertive people. However, we also learn to balance our approaches in life, trading, and perhaps even politics. I’m giving several practical tips on how traders might approach Tuesday’s election in today’s article.
Avoid The Madness With Personal Balance
First, I suggest that you consider sitting on the trading sidelines. The price action could get volatile, and I have already received emails from multiple futures brokers who are raising margin temporarily during the potentially explosive upcoming week. It might be that the best option is to sit this election out, trading I mean, and sit back and enjoy the entertainment.
One might also throw a party and watch it all unfold. Of course, any party would need to follow your state’s COVID19 protocol. The worst thing you can do as a trader is to get upset at the so-called “fact-checking” and outcomes. We learn to keep our trading views separate from our personal political preferences. I recall one particular instance of a trader who was guided by his personal political views. Unfortunately, the market was unconcerned with this trader’s opinion. While the trader positioned his theory, he became further stubborn, insisting he was correct, until he eventually blew up his account. True story!
Now I will give some opinions of how some scenarios may play out from the election. The safest risk scenario is a divided government. It seems inevitable that the Democrats will retain the House of Representatives. However, from a risk perspective, the most prominent concern is for a landslide. It seems plausible that Biden will win the White House, however, in a perfect storm for Democrats, this could turn into a landslide, and they win over the Senate. To do this, the Democrats must win nearly every Senate seat that is contestable, something that is possible but unlikely. However, should they accomplish this feat and enjoy the trifecta of victory, the markets will respond with volatility.
Meanwhile, should the Republicans retain their control of the Senate, which I expect them to do, then whoever wins the presidency will be important but less crucial because a divided government will stand.
I don’t believe the election outcome will be so close that the winner is unknown for weeks or even days. However, some states are now permitted to count absentee ballots for days following the election, which could throw some shade on the overall results. Notably, in the case of the U.S. Senate, where a state like North Carolina has a seat that could flip from red to blue, they will be counting late ballots.
If there is any ounce of uncertainty, what will the results be? Quite possibly investigations, lawsuits, and court rulings, not unlike the 2000 election. How will this affect markets? The only thing I can assert is that markets do not like uncertainty.
What To Watch For
For me, the most critical element to watch for is how accurate the polling has been when returns come in on the early results from the east coast. Senate battles like Maine, North Carolina, South Carolina, and Georgia will be interesting to observe. Meanwhile, the results of the Presidential votes in New Hampshire, Pennsylvania, North Carolina, and Florida will be crucial. If these returns look similar to the polling data, it will be a good night for Democrats and increase the Democratic landslide’s potential.
In contrast, should the results suggest that the polling was so far off, like it was in 2016, then uncertainty will prevail throughout the evening, likely leading to volatility in the financial markets.
Key Trading Rules For Elections
There is often a two-fold action during high volatility events, the initial move and then the fade. Sometimes the trick is timing the fade. For example, in 2016, the financial markets went “risk-off” as the election returns were being posted in favor of Trump. However, the next day, there was a massive swing as markets went “risk-on” overwhelmingly. In other instances, it doesn’t take hours to fade the initial move, but only a matter of minutes.
This is one of the significant challenges to trading these type of volatility events. They can be extremely rewarding but risky. These types of markets are when your tried and true indicators are destined to fail.
If you are intent on trading the election results, then good luck. However, you might consider trading a smaller size. Sure, your gains might not be as sexy on paper, but your losses won’t be as profound either. These events are when data gets screwy, and platforms freeze up, so anything that can minimize risk exposure is a plus.
Where to Place Stops?
Stop-loss orders are generally imperative. However, with volatility events, this becomes less precise. When the order book is leaping back and forth, I’ve had stops taken out as soon as I entered the trade. Automated stops are helpful to minimize risk, but volatility causes trades to need more breathing room to operate at times successfully.
Tell me what your approach to stop-loss orders in volatility events. Also, what are your opinions on trading this election? Will markets respond with overwhelming volatility like in 2016, or is this overhyped, leaving the markets to trade more range-bound?