A Strong Word of Caution in 3 Charts

Many of these have an impact on all markets, such as monthly unemployment reports, FOMC interest rate decisions (and subsequent press conferences by the FOMC chairperson), political elections and more.  Also, while not impacting markets across the board, many events and releases can have significant impact on the specific products you are trading – such as equities earning releases, central bank meetings from countries outside the US, the time period around contract rolls for bond futures, etc.

As traders – we patiently wait for opportunity, and when we enter into trades we normally aren’t expecting instant results.  We have put on intelligent, well thought out positions that have multi-day, and multi-week time horizons.  The problem taking these positions into an impactful release is that, in the moment – everything turns into a coin flip.  Markets can significantly trend, especially if the result is the slightest bit off from what was expected, causing quick stop outs.  

Worse, when results are significantly off expectations, markets can have gap moves

Heading into these events, consider reducing your position size, or having no position at all (also known as being flat).  Doing this not only reduces risk, but it also gives you more ammunition – the ability to enter into new trades.  In the bond trading groups, I managed, I would always tell my traders to have no more than one-third of their maximum positions on heading into monthly unemployment releases or an FOMC interest rate decision.  I wanted them to be able to triple their position size if the set up was right.  Again, a benefit of impactful releases is that they often create new trading opportunities – (although let’s give it a little time after the event for the market to settle in).  Wouldn’t you rather be focused on new opportunities being presented than a rapidly declining account value?

If you are carrying positions into major releases and events – consider if there are ways to hedge your position.  If you’re short equity options heading into an earnings release, butterfly the position off by buying the wings.  If your currency portfolio consists of “risk-on” positions heading into an important international election or rate decision, buy some traditional safe-havens.  

VIEW YOUR HEDGES AS INSURANCE POLICIES.

Remember, first and foremost – protecting your account is the top priority.  While these impactful events could benefit your position, they are also the most likely path to an instant stop-out, or worse.