This year has started with a bang in terms of headline news. Whether it be the conflict in Syria, the North Korean situation, or a potential global trade war, it seems there are important developments announced daily which affect these news threads (and many more).
No matter what products you trade and what strategic approach you've adopted, an increase in the number of stories that can impact global financial markets has likely affected your perception of the current trading environment.
Generally speaking, markets that move around a lot often offer more opportunities for traders. As uncertainty increases, so too does the number of mispricings that traders can identify and capitalize upon.
As pointed out in a recent episode of Market Measures, that also likely means that traders need to trade smaller, and remain more nimble. In fast-moving markets, concentrated exposures can get run over quickly, and significantly.
Dynamic conditions such as these also reward traders that are well prepared. By looking ahead into the news cycle, traders can map out potential positions and strategies in case certain events come to pass, or certain market conditions materialize.
One possible scenario that every trader should plan for are further corrections in global equity markets. Not because such a development is 100% looming on the foreseeable horizon, but because it's good risk management behavior.
The first quarter of 2018 has already shown quite clearly that the range in global indices has widened considerably from last year. With markets already on edge, a surprise news development could spook a quick embrace of the "risk-off" approach.
Traders should understand how their portfolios would perform under such conditions, and whether they can accept the associated risks. A contingency plan can also be sketched out to identify a list of trades that can be used to protect your portfolio should the need arise.
Along those lines, traders can also map out potential responses to big developments related to important news threads. A good example is the NAFTA story, which has been pushed to the back-burner as the world's attention became transfixed on Syria, North Korea, and Chinese tariffs.
Should NAFTA once again be dragged into the spotlight, there may be new opportunities in the market for traders that have identified companies, ETFs, or indices that could be affected by changes to this well-known trade pact between the US, Mexico, and Canada.
Obviously, there are degrees to which NAFTA could be altered. These range from no changes at all, to being scrapped altogether. While the latter scenario is extremely hard to envision, there remains a very small chance that could actually come to pass.
Good preparation as it relates to NAFTA might involve creating a list of all companies that are most reliant on the trade pact. From there, one could develop trading assumptions based on possible news developments.
Traders that outline such plans ahead of time can act fast when opportunities present themselves, instead of going through such analysis in the days following the announcements - which is usually too late.
While the complete withdrawal of the United States from NAFTA is extremely unlikely, such a development might represent one of the best opportunities of the year to place high-probability exposures. At the very least, you will be able to act swiftly to hedge risk in your existing portfolio.
If you need an example of how valuable such planning can be, simply review the price charts of several well-known Chinese stocks in the wake of the tariff rhetoric that erupted between the US and China. Looking at BIDU and BABA, one can easily see how smart planning may have resulted in positive returns.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
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