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 it 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.
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.
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.