How do you account for severe Political Issues in trading?


sqa

Village Scribe
Since I'm very new to Forex Trading at this point, I'm curious about this.

First note, I pray Ukraine doesn't descend into Civil War.

However, that's a huge possibility over the next few weeks. This would be the first war in Europe since the Balkans and risks a major effect on European Natural Gas supplies. (Major pipelines in Western Ukraine)

This is a sign to be wary of EUR pairs? Just stay out of that part of the market? Or look for opportunities to capitalize on panic moves?

There's also the issue of personal ethics with something like this, which might be its own thread.

Thoughts?
 

jack

Administrator
Staff member
Before anything else, I too do not wish for things to get worse over in Ukraine, the whole situation there is ever so concerning. :/

That said, it would create uncertainty and that doesn't get along with risk appetites very well. So in theory it would cause people to run for safety to more secure asset classes (and historically that means the euro takes it a little on the chin.)

However: The biggest moves in asset prices caused by "war actions" and fighting were when it was unplanned and with little forewarning.

I can't tell you what will happen if Ukraine goes down that path, but I can compare it to other political/war turmoils we've had lately: Oil and Syria for example. As the threat of the US stepping in created uncertainty over the future of that region (and if the US will be sucked into another theater of battle,) the price of oil started creeping up in a very strong rally. It ran particularly strong when Kerry announced the US could start missile strikes in Syria in as early as a few weeks from his speech denouncing Assad... but once the first missile struck and US aid to rebels began, oil's run was over and we actually saw declining prices for a period of time. Why? Because the world had notice, it was planned, they had time to think out the risks and hedge, or not care since the impact on oil supply would be limited... The point was, it wasn't some snap decision and instant action that causes everyone to panic and be uncertain about the outcome (and by default, war in that region == higher oil.)

So how do we apply this to Ukraine? What will continued violence, or even civil war mean for that region and asset prices? Where will money flow? Remember, they aren't using the Euro, or the Russian Ruble.. so likely the Hryvnia will take more of a hit... Perhaps the Euro gets a little pressure too depending on how more more involved the Euro Union gets moving forward.

Really, I'm waiting on Russia to show their cards before I have a firmer opinion.. Politically speaking, this whole mess is extremely complicated.. and if Russia steps in to secure the pro-russian areas of Ukraine, that would make things rather messy.

Anyway, I can safely say I don't know enough about Ukraine's history, or every facet of the problems leading up to where we are now for that matter, to really contribute.. all I'm planning to do about it is follow along and watch Russia closely (not because of any distrust of them, just that I think the US and EU will be far more likely to remain passive for as long as possible in comparison.)
 

jack

Administrator
Staff member
There's one take away: Uncertainty will create volatility in most related asset classes. Traders are all about volatility, less size needed to push larger numbers. :D

(And the fx market could use a good pickup in volatility... that's for sure.)
 

jack

Administrator
Staff member
Apparently the party is over in the Ruble

http://forexmagnates.com/ukraines-political-debacle-helps-ruble-volumes-to-hop-around-in-offshore-futures-and-ndf-trading/
 

sqa

Village Scribe
So, Turmoil = Good; lots of Deaths = We don't want that, but it doesn't hurt business.

At least Ukraine seems to be okay. For the moment.
 

jack

Administrator
Staff member
Not quite turmoil, no. Volatility == Good (for traders.)

How we get volatility is another question. Usually panic and uncertainty create it, but unless it's a financial crisis or pricing crisis, that means political or war actions (sadly.)
 

jack

Administrator
Staff member
Think of it like this.. Trader's don't care what causes volatility, they just care about being on the right side of it.

The higher the volatility, the greater instances of possible trades arise, and since things 'move' a bit more, it can take less size to make the same $ amounts in the same time frame as when there's lower volatility.

The trap a lot of traders can get into is putting on way too much size when volatility is low. They do this to compensate for the lack of movement (to make their trade worth more P/L wise,) and this works for a while til volatility picks back up again (it always does, it never stays low, even with QE and the fed these days, it will return to greater amounts.) Volatility picks up again and their larger size trades become more of a liability than a good thing.. and if they aren't careful, their account can get run over by their own position management.

The idea is to be adaptable as vola changes.
 

Ramy3

May the pips be with you!
Jack said:
Think of it like this.. Trader's don't care what causes volatility, they just care about being on the right side of it.
Y'a seem to be learning. :) Figuring out how to be on the right side of it is a whole different process... It is way simpler than many think it is... Lots of time needs to be put in before figuring out though.

Cheers!
 

sqa

Village Scribe
Welp, looks like we've got an Invasion of the Crimea for some good old volatility next week.
 

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