How to trade before and after political elections

The national political elections of a country are always one of the events that generate a lot of volatility on the Forex markets, with the relative possibilities of gains. Trading near these events, however, is not easy, since a trader must constantly inform himself about the possible scenarios and the effects that public opinion and analysts assign to the different political parties or exponents. Constantly following the news and opinion polls is therefore the first good rule for an investor who decides to profit from these events.

Secondly, it is important to make a distinction between the trading activity that takes place before and after the election. In fact, strategies and market positionings are different, depending on whether you are before or after the consultation. What does usually happen? As traders read opinion polls published by the major media, they get an idea of ​​who could win the election and the possible positive or negative effects of the victory of a given party or coalition. For example, in the case of the United Kingdom’s national election of 12th December 2019, the Pound appreciated strongly against the euro and the dollar ahead of the election day, because opinion polls gave for certain a victory of the Tories candidate Boris Johnson, giving very likely he would have achieved a majority in the Parliament that would have allowed him to have the necessary political support to finally start Brexit. A clear result would have made London’s exit from the European Union certain. An option that was certainly not preferred by traders, but that at least would have put an end to three years of negotiation failures.

However, when victory by a party or coalition is not given for sure, traders, especially fund managers and investment companies, tend to keep themselves out of the market. This is why the volatility around the currency involved decreases approaching the election day. Only a few hedge funds or speculators continue trading. The advice is therefore to avoid taking positions in the presence of uncertainty about the outcome of the elections before the election day.

Everything changes as regards the trading strategy to be followed immediately after the announcement of the election results. In this case, there is no “rule of thumb” to follow and everything depends on the electoral outcome. Even at this stage, however, we can distinguish between two scenarios. If the electoral outcome confirms the forecasts, it is likely that the currency in question continues the trend it had before the election and that there is a marked strengthening or weakening. It is difficult to observe the case of a “counter-current” market trend, typical of the strategies based on the “buy the news, sell the fact”, even if this case study cannot be excluded. Even in this case, however, it is likely that the correction is only a profit taking by the market. The main trend is expected to recover a few hours later.

If the election result does not confirm the forecasts, the situation could create a lot of market volatility, whether the outcome is better than what the analysts thought, or worse. At this point, it is important to understand what kind of trading you want to do. If the goal is to adopt a purely speculative approach, it is necessary to open a long or short position immediately after the outcome, except to close it a few minutes later. If the approach is more medium-long term, it is better to refrain from performing operations in the minutes / hours immediately following the outcome, to enter the market when the volatility has decreased, following the defined trend.

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