I’d venture to say that nowadays, geopolitical risk is a factor you think about quite regularly in your trading, yet it may also be a term that’s relatively new to your vocabulary. Perhaps it’s a sign of changing times in the markets, and indeed, in the world, but it’s only after the financial crisis that most began paying attention to geopolitics. Afterall, in the past, credit crises and bailouts, not to mention buzzwords like “Brexit,” “Flash Crash,” and other phenomena weren’t as front and centre as they are today.
The fact is, though, that in a tumultuous and divided world where horrors like terrorism, religious persecution, and violent military conflicts are present every day, geopolitical events are perhaps the most prominent of all market-moving events. So prominent is geopolitical risk, in fact, that it should play a role in your trading…just maybe not the role that you think.
You see, longer-term swing traders like those of us who follow the Lazy Trader methodology will analyse and process geopolitical risk differently than, say, intraday traders. So while geopolitical risk is a factor to consider, here are a few ideas for decoding its shorter-term impact and remaining confident and committed to your longer-term positioning in the markets.
First, What Is Geopolitical Risk?
Traders and investors have seen plenty of geopolitical risk return to the markets here in the first part of 2017. Donald Trump becoming US President, for example, created a great deal of geopolitical risk due to his divisive and controversial nature, for one, but especially because of Trump’s comments about his desire to change the way the US conducts business and trade with the rest of the world. That, almost by definition, is what is meant by the term ‘Geopolitics.’
Geopolitics: The study of how geography and economics influence politics and the relations between countries. (Source)
The fact that world equity markets moved sharply lower in response to Mr. Trump’s victory in the Presidential election was a textbook example of geopolitical risk in action. But so, too, are any and all market reactions that come, say, in response to any escalation in the global tensions with Russia and/or North Korea, the ongoing conflicts in Syria, Ukraine, and elsewhere, and following terror attacks, whenever they (very tragically) occur.
What Geopolitical Risk Means to Longer-Term Traders
Particularly in this modern era, when news and headlines from around the world consistently move markets, geopolitical risk is a factor that every trader must watch…but I’d assert that longer-term traders needn’t fear geopolitics in quite the same way intraday traders would. And here’s why:
Because while news and geopolitical risk make markets behave unpredictably in the short term, over time, dominant forces like that market’s prevailing trend, and the technical and perhaps fundamental forces that traditionally drive markets, still tend to win out.
For longer-term traders, some of the important considerations for trading around geopolitical risk are:
- Entry Strategy: Markets will move sharply on the back of sudden escalations in geopolitical risk, like from military strikes and terror events, meaning traders can get whipsawed or faked out at or near their entry points. And while longer-term traders can smooth out those price swings by trading end of day, and/or trading on longer time frames like the daily and weekly, geopolitical factors can make it hard to catch an entry on any time frame. So stay patient when trading amidst geopolitical risk, and if you miss the first entry, keep that asset or currency pair on your watch list for next time, because while geopolitics temporarily elevate risk, they’re unlikely to permanently alter a market’s technical and fundamental picture.
- Risk Management: Heightened geopolitical risk can make for a fine reason to take profits on open positions, particularly those that have reached initial targets. By locking in hard-earned gains, traders preserve and protect capital from heightened risk and become better positioned for trading once geopolitical risk has cooled.
- Psychological Impact: Some geopolitical risk, like the 9/11 terror attacks, or war in the Middle East, create outright panic across markets and investors and traders alike. Choose not to trade whenever geopolitical risk is too serious, and avoid the irrational, fear-based trading that often ensues during these times.
How would you like to listen in each week as we discuss geopolitical risk, as well as the other technical and fundamental factors impacting currencies, world equity markets, and our trades? Join the Lazy Trader community for continuing analysis, ongoing text and video content, and timely trade ideas you can copy at home. Click the banner below to activate your no-risk trial membership today!
Latest posts by Rob Colville (see all)
- Trade with The Lazy Trader in 2017! - November 18, 2016
- Round the Clock Trader Live – How to Trade the News - November 8, 2016
- Why There’s Little Room for Expectations in Trading (or in Life) - October 14, 2016