We've talked about it for months. "There will be volatility coming into the election." "Safe havens may rally on the volatility." "The VIX is at an all time high."
Now we're in the neck of the storm. We are five days away from the election, and markets are trying to price in numerous possibilities alongside the Coronavirus's everchanging environment. In 5 days, we will know who will run the world's most influential country for the next four years.
Here's a couple of things you should know if you want to benefit from the possible wild swings the election may bring.
The election is on the 3rd of November, in the United States. However, there is a chance Trump contests the outcome if he does not win. If so, volatility in the markets may increase.
During market-moving events such as NFP and Central Bank, interest rate decisions affect respective currency pairs significantly. During these periods, traders and investors form their own opinion on what will happen and place trades. Therefore, Liquidity might be low, which may increase the spread (the difference between the bid and ask price).
During the election, there is a high chance fluctuation on who currently leads the race will occur, possibly whipsawing currency pairs as the votes come in.
This is important to note, as not only does this increase the cost of entering into a trade, but this may affect your stop losses and take profits. There is also a chance you hold your trade after market close on Wednesday; you may be charged with a triple swap.
You may remember, at the start of the year, when Coronavirus was slowly starting to pick up in the United States, the sharp market drops forced a halt in trading in equities due to the inbuilt Circuit breakers disincentivizing panic selling. For example, circuit breakers are set to halt trading in the S&P 500 when there is an intraday drop of 7%, 13%, and 20%.
During the election season, massive swings may force these circuit breakers off. This is likely not going to follow through in the CFD markets – however, this may force massive spreads when trading. Traders and investors should keep an eye out on the news during election day to avoid getting hit with high spreads.
Many traders and investors enjoy trading wild swings because a lot of money can be made in a short span of time. However, this also means a large amount of money can be lost in a short span of time. Combine this with wide spreads, which may force many traders to hold onto traders to recoup the spread's cost to break even. It is essential to have a stop loss that mitigates your risk as much as possible, with suitable take profits to manage losses.
It will not be a surprise that volatility will increase on election day. The only thing you can control is how you trade the volatility. Will you take care of your risk?