Political drama may be a very interesting phenomenon in the context of finance.
The market volatility resulting from political and economic crises may be enough to deter many would-be investors from entering the market due to fear of what the short term may hold in store.
When a particular stock or currency is frequently hitting new highs and lows and generally behaving erratically it can be difficult to know whether to risk capital or aim for some hefty profits that may be made.
Benefiting from the Chaos
Day traders who trade on a very short-term basis are possibly the ones most likely to use market volatility to their advantage.
This type of trader will keep a close eye on the price of a given financial instrument, even exploiting the changes that take place from one minute to the next. Given that political drama leads to extreme volatility, one can easily see how this type of environment might be beneficial to the day trader.
When there is political chaos, there is great uncertainty and this leads to volatility. The more volatility there is, the greater the price range on a given day. In effect, this means day traders may have a larger trading range with which to possibly profit from. Take a look at the recent chaos in Greece or China and you will see how trading ranges increase with drama. A common technique for day traders therefore is to lower risk but increase profit targets. This allows them to capture more of the trading range.
On the opposite end of the spectrum we have longer-term traders who adopt a buy-and-hold strategy to hold onto stocks for many months or even years.
The interesting thing here is that a stock or currency that is experiencing a great deal of volatility may give it a surprising new low, giving the buy-and-hold trader a prime opportunity to enter the market and simply play the waiting game until the price begins to level out again at a higher set-point.
Falling somewhere between these two extremes strategies are swing traders who typically trade on a daily or weekly basis.
Swing traders are able to use technical indicators such as moving averages and Bollinger Bands® in line with established support and resistance to identify where a price reversal may occur.
This approach to trading on volatility can be difficult as it typically requires a keen eye for detail and a reasonable level of experience using the relevant technical indicators.
Nevertheless, identifying resistance and support levels enables swing traders to identify when momentum has been lost on an upswing in order to short the stock and then close the position as the price begins to reach support again.
Conversely, when price r,eaches support, the very same swing traders may go long and then sell once the previous high or resistance point is reached.
Short-term trading and day trading may appear to reap negligible profits because relatively low volumes are being traded.
Bear in mind, however, that identifying short-term support and resistance points may enable a trader to enter and exit the market almost at will, taking advantage of practically limitless opportunities to skim a few points here or there.
All of this is possible thanks to market volatility, so when political and economic chaos ensues you might want to reconsider your trading strategies and exploit the situation to your own benefit.