How to learn to use political news to open positions in the market

 News from the world of politics can tell you the best time to enter the market. The downside is that it is impossible to predict when this news will be published. The main benefit is that experienced traders can add this information to their trading toolbox and use it when the time comes.

Political risk is the likelihood that a political event could affect investment. This does not necessarily imply a decrease in the value of the asset. Political risk may indicate positive developments, which could result in higher GDP growth, higher corporate profits and higher share prices. However, a huge scandal is not excluded, which will undermine economic growth - the whole point is to learn to feel the difference.

There is another distinguishing feature of political risk that every trader should be aware of. Most of the political news has very little effect on the fundamental picture of the world. Political events are emotional and fleeting, often limited to flashy headlines and unverified rumors. Such events may lead to a rise or fall in the market, but the fluctuations will be minor. If the news goes against the dominant trend, it most likely indicates a buying opportunity, and if it matches it, then there is a possibility of a breakout and continuation of the dominant trend.

Political news that affects the fundamental picture of the world has a more lasting effect on the market. Negative developments (for example, the new government crushed businesses and raised taxes) could cause the bull market to change, or at least enter a deep correction phase. Positive developments can reverse a bear market or strengthen trends in a bull market so that index prices soar to record highs.

Another distinguishing feature of political news is its importance. They can be meaningful for a small group of people, an entire nation or the whole world. The attempted coup in Turkey last year was unsettling but ultimately had a local effect, Brexit is a different story. This event will have a long-term impact on world trade, global stock and foreign exchange markets.

Absolutely all markets depend on political news, but currency markets are the first in this row. The release of news of a certain nature can affect the mood not only within the country, but also in foreign countries. One event can simultaneously weaken one currency and strengthen another, so currency pairs such as EUR / USD and USD / JPY can show an accentuated movement in a short period of time.

As an example, consider the election and inauguration of Donald Trump. The American and global economies had been on the path of slow, steady growth for many years prior to the election process - and there was no reason to believe that anything would change. This is a real example of the status quo, and since Mrs. Clinton stood for the status quo, her election guaranteed (from a market point of view) the continuation of established trends. Donald Trump's position is a change, which means that there is a risk for the market and not at all the status quo, so his arrival could only guarantee high market volatility, despite all the focus on economic growth. All this, as well as a huge number of scandals that erupted during the election race, led to market volatility.

The chart above shows that the S&P 500 entered a consolidation phase at the height of the political campaign. During this period, the index declined slightly, but more importantly, moved to a long-term trend line. Post-election relief and massive trend buying confirmed the trendline and led to what we now call the "Trump Rally." This rally is a product of long-term economic trends and the status quo and is based on the belief that Trump will not make the situation worse, but will most likely do a little better and can do even better ... Of course, if a fleeting political scandal does not spoil his plans. Until then, this news will serve as market entry signals for experienced traders.

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