This Forex Trading Strategies post will talk about the concept of trading the ever changing bias surrounding polls as and when they are released.
In the video above, my head analyst, Nick, kindly recorded a trade he took in June 2016, during the weeks leading up to the UK EU referendum. He actually made a significant amount of money trading the event as it happened, which you can see here: http://www.jarrattdavis.com/110000-profit-trading-uk-referendum/
This trade example is focused on a specific event, but it gave me the opportunity to write about the principles he used in this trade, as they can be applied to any polls monitored by the markets.
Obviously, referendums of that magnitude only happen once in a generation. However, there are lots of similar polls during other times such as political elections.
By including these other types of polls, you can see that this can actually be a pretty solid trading strategy that can provide some very good trading opportunities as the political winds change from year to year.
How we made money from the UK referendum polls
The basic principle to trading these polls is simply understanding what the general market expectation is at the time they are released, and then determining at what point the market might suddenly realise they have been wrong and flock to get back on the right side.
For example, in the video above, you will see that the general market expectation was that the UK would vote to remain, but the simple fact there was so much uncertainty was making everyone a little bit nervous.
This instantly gave Nick and the rest of our trading team the knowledge that the market was concerned. Their attention was then focused on not actually knowing what could happen next. So, during this specific time, the risk to the GBP was definitely to the downside, and anything to suggest that this uncertainty could be expanded would only serve to confuse and concern the markets further.
When a poll came out saying that the ‘leave’ camp were winning (which created even more uncertainty), the markets natural reactions based on their current expectations were to sell the GBP. By doing so, they avoided all risk of being involved in that trade.
When other polls came out suggesting that the ‘remain’ camp were then winning, the GBP could then be expected to rally because the markets main concern (uncertainty) had been soothed.
The biggest lesson from all this
The biggest lesson I want to share in this post is not that you should simply buy or sell based on simple headlines or poll results. It is that you need to be 100% focused and tuned in to what the general market expectations are at that specific time, and be able to spot opportunities to take advantage of these expectations.
Let’s look at this another way, by staying with the UK referendum.
As the polls played out, the bias generally stayed at around 50/50 and then in the day or two running up to the vote, the markets did something quite fascinating.
They went all in on the conviction that the UK wouldn’t really vote ‘leave’ and that everything would be back to normal the very next day. This conviction resulted in cable rallying from the low 1.40s all the way to 1.50 in a matter of days. The positive momentum in markets was unstoppable … And irrational.
The simple fact remained that there was still a massive amount of uncertainty, and anyone actually listening to a broad spectrum of people on the ‘ground’ in the real world of the UK could feel that an upset could very well be on the cards.
Regardless of this, from a traders eyes, it was clear that the market was expecting a ‘remain’ vote, and had positioned themselves accordingly.
This mean that whatever happened, the risk was always to the downside for GBP.
Going into that vote, the economic situation of Britain wasn’t great and there was already talk of possible rate cuts coming along over the next few months. So even if there was a ‘remain’ vote, the UK would have been in this same situation as it was before… So no real reason to keep buying GBP if the vote had gone remain.
The position was massively overbought, no matter what the outcome.
So when the results started coming in, showing a massively unexpected win for ‘leave’ … The tone was set and we knew that there was only one way for the currency to go, with all things considered.
The reason our team made money off this event was because they understood the markets expectations but also saw that no matter what happened at the poll, the only real direction for GBP was down after it had finished. The question was how extreme the move would be.
How to trade other polls
There will be many other polls in your trading career and the general principle to making money from them is not simply to trade the positive or negative headlines, but to remember to tune into market expectation and also spot the opportunities that will allow you to make money.
These opportunities are generally composed of scenarios where you realise that the market is just plain wrong or where you can see that they have committed so much to the current position that there is simply no one left to keep the move going.
But training your brain to look out for these type of scenarios, as we did in the example above, you will have a much better time at consistently trading these type of events.
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