By Rob Colville on March 25, 2016 in
Once again, tragedy struck the international community this past week, as the terror attacks in Brussels sent fear and shock waves throughout the world and financial markets. It was yet another sad reminder that unexpected macro events are constant threats to the markets and our trading.
But what’s the real impact when macro events like this happen? How long will the effects weigh on the markets, and what should traders do with any open positions? Moreover, what adjustments, if any, should be made to your strategy in the aftermath, and how do you resume “normal” trading once again following major macro events?
Let us all hope that such tragedy like we saw this week won’t soon be repeated, but also remain vigilant and aware that macro events are forever looming. Here’s how to respond effectively when crisis ensues and preserve more hard-earned capital when macro events roil world equity and forex markets.
Many traders look forward to the release of news and economic data, for it’s somewhat expected and helps move markets in a normal and “healthy” fashion. Macro events are much different, however, and can happen without notice. Moreover, macro events have the power to influence all facets of the economy and markets, producing sharp, sudden shocks for which traders and investors alike cannot fully prepare.
The most frequent—and unfortunately, inevitable—macro events may include:
QE & Changing Central Bank Policies: Perhaps the most important fundamental factor impacting world currency markets in the modern era, the direction of countless major currencies, from the US dollar (USD) and euro (EUR), to the Japanese yen (JPY), British pound (GBP), and commodity currencies, hinge upon central bank monetary policies. And, as seen last January, when the Swiss National Bank (SNB) erased the long-standing peg on the Swiss franc (CHF), chaos and unlimited risk can ensue on the back of unexpected policy changes.
Geopolitics: Escalations in any of the ongoing conflicts around the world, whether in the Middle East, Russia, or elsewhere, always tend to get the attention of investors, who are quick to hit the sell button in the face of violence and geopolitical strife. New conflicts, should they arise, might be even more powerful due to their unprecedented market impact. These macro events, however, also tend to be short-lived and dissipate once the conflict dies down.
Terrorism: The markets have also proven rather resilient to terror attacks, as evidenced not only by the events of this week, but by past instances as well. Two- to three-day market reactions occurred, for example, following the 2004 Madrid bombings, the 2005 London incident, and last January’s Charlie Hebdo terror attack. The longest market reaction occurred following the 9/11 attacks and lasted for eight sessions. (Source: Kathy Lien, BK Asset Management)
Macro events often require traders to take quick and decisive action regarding open positions. While intraday trades would likely be stopped out on the heels of a wild price swing, those who trade longer time frames could have to decide: Close out or wait and see?
To determine that, consider whether the market environment is likely to be affected beyond the coming trading days, or if a lasting response—like QE and/or government intervention—may follow. Also consider whether you remain comfortable with the position, and if the justification for taking it is even still intact?
Higher time frames should naturally help dampen the impact of macro events like this past week’s terror attack, but nonetheless, many traders will elect to avoid undue risk and protect capital by closing all or part of their open positions…and that’s just fine!
Even once stability is restored and more “normal” trading resumes, however, trading half size and/or risk might be a good idea at first, particularly on the heels of severe macro events. That’s a good way to ease back into trading and re-gain a feel for the markets. And, it also helps to look for a bit of confirmation on your trades—like with this comeback set-up in AUDCHF—if you’re keen on confirming your set-ups, that is!
More than just being successful in good times, trading well for the long term requires staying safe in the face of sudden macro events and ever-changing market and economic cycles. Choose a methodology that’s proven-effective in good times and bad, and see how longer-term trend trading can offer distinct advantages in difficult markets. Click below to begin your journey today!