How Should You Trade in a Geopolitical Market

Tips for Trading in a Geopolitical Market

Traders generally like geopolitical tensions as they create volatility. This is true in the current market as it takes the focus away from the bi-polar trading on interest rate expectations.

The latest geopolitical concern is growing hostilities in the Middle East with reports that Iran is preparing a retaliatory military strike against Israel military targets. Up to now, there has been little reaction to growing tensions until the latest reports that Iran was preparing a military response following Israel stepping up attacks against Hezbollah.

Geopolitical trading pattern

The pattern has been that geopolitical events that would typically have led to panic type trading have fallen shy of morphing into a crisis. This has proved true in the current world where a confluence of geopolitical events (Ukraine, Israel-Gaza) initially upset markets but not led to crisis trading.

I don’t want to date myself but I remember back in the 1980’s the Soviet president was ill and a day did not go by without a rumor that he had passed away. As time went on, these rumors had less and less affect as his imminent death got factored in so by the time he passed away it was met with a big yawn.\

This is the nature of geopolitical markets where the worst case gets priced in and then markets have to adjust to the realities of the situation.

How to trade in a Crisis

To keep it simple, the answer is to go with the flow but DON’T OVERSTAY YOUR WELCOME.
This means don’t hold out for the last pip for when the focus shifts, the reaction can be swift. One reason for this is a tendency to factor in the worst case and then back off when the worst does not materialize.

In my many years of trading, I have found that most politically driven markets tend to have short shelf lives. Either the worst case does not materialize, a crisis is averted or the market becomes immune to the news. It then tends to lose its importance as the focus reverts back to underlying fundamentals. A “geopolitical market” needs a continuous flow of news to keep risk elevated.

Geopolitical new reaction: Safe haven buying of JPY

A word about the current geopolitical events: traders like to think short-term but some of these events may go on for a lot longer than anyone would like. However, if the worst case basis does not materialize, these events will become background news unless the situations deteriorates so that the worst case has to be factored in again.

Let’s hope this turns into another one of those expect the worst but does not materialize situations.

To stay in touch with the news in real-time, this is the best source I have found to use with my trading… Newsquawk.com