There are always situations in the market or events that you cannot plan for and they can have a significant impact on your trades and trading.
In this article we will go through four trading events and see what we can do to prepare you if they arise.
Let’s start…
Event #1: Black Swans: Expect the unexpected
Black Swans are anomalies.
These are highly unpredictable trading events that can create massive shifts in the markets.
Let’s start with a definition that explains Black Swans the best:
A Black Swan is where an event can cause the market to move 10 standard deviations away from the usual norms.
This disruption can have severe and wide-reaching consequences.
Here are a few major Black Swan Events that had a major impact on the markets.
• COVID-19 Pandemic (2020 – 2021)
• Oil Price Negative (2020)
• Brexit (2016)
• Swiss Franc Unpegging (2015)
• Fukushima Nuclear Disaster (2011)
• Flash Crash (2010)
• Global Financial Crisis (2008)
• September 11 Attacks (2001)
• Dotcom Bubble Burst (2000)
• Japanese Asset Price Bubble Burst (1992)
When you see the market move dramatically due to an unprecedented event there are a few ways you can protect your trades.
1. Risk less (from 2% per trade to 0.5%) as the market can be very volatile.
2. Take a breather from trading until the markets settle.
3. Prepare for your stop losses to be triggered and once you’re out, stay out until you have more clarity where the market is moving.
Event #2: Non-Farm Payrolls (NFP) – And the ripple
I can’t think of a more important event than The Non-Farm Payrolls (NFP) report.
It is released monthly on the first Friday.
The NFP serves as a key economic indicator that can induce major volatility in the markets.
It shows us the total number of paid US workers, excluding farm employees, government employees, private household employees, and employees of non-profit organizations.
When the numbers are higher than expected, there are more jobs and the stock markets go up.
When the numbers are lower than expected, there are less jobs, more pessimism which causes stock markets to plummet.
Significant deviations from forecasts in the NFP data can lead to major spikes in market volatility.
Most traders I know, who trade Forex, do not trade on NFP days.
There are a few reasons including:
1. High Volatility (Jumpiness)
Non-Farm Payroll (NFP) releases often cause major market volatility and moves.
This can make price movements unpredictable and risky for when you trade.
2. Uncertain Outcomes:
When NFP numbers come out higher or lower than expectations, we normally see drastic price moves.
And this can cause the market to jump and hit stop losses if the trading levels are close together.
3. Increased Spreads:
This is one brokers don’t really want you to know.
But when NFP comes out, brokerage spreads tend to widen.
This normally leads to higher transaction costs for traders.
This is one day you can literally take off from trading Forex. Or you can look to trade stocks instead (as there is less of an impact).
Event #3: Micro and Macro Announcements – Keep in mind
If you’re a stock or currency trader, it’s good to know when major economic announcements are released.
I’m not saying you need to be on top of every news announcement, as this can be time consuming and stressful.
But you can skim through them to get an idea on how the market is doing.
On a micro level, I like to read up on the following when trading stocks:
• Earnings reports
• New product launches
• Executive changes
• M&A activities
• Rights Offers and share distributions
On a macro level, I watch out for these announcements.
• Changes in monetary policy
• Inflation rates (CPI)
• QE (Quantitative Easing)
• Credit tightening
• GDP growth
• Consumer sentiment
• FOMC, Central banks meetings and economic talks
• and geopolitical events
You’ll see these events will cause a ripple effect on the general markets. And this will have an influence on the prices of the markets.
NOTE: Even though there are many announcements to follow, I always stick to my strategy and do not let them dictate what to buy, sell and adjust.
Event #4: Huge gaps and market volatility
When you go to your chart, make sure you’re aware of price gaps in the market.
Price gaps appear when there’s a difference between the closing price of one trading period and the opening price of the next.
Here’s a gap up example with Naspers Media company (JSE:NPN).
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This typically occurs when a market moves upward during a day and then experiences a larger, leading market crash.
Or the first market opens much lower than the previous closing price.
These gaps normally take place after a market event or during some impactful news.
You can think of it as an indicator to check up on the trade you’re in. This way you can see if there is anything to worry about or prepare for.
Let’s sum up these four important events you need to watch out for when you trade.
Event #1: Black Swans: Expect the unexpected
Event #2: Non-Farm Payrolls (NFP) – And the ripple
Event #3: Micro and Macro Announcements – Keep in mind
Event #4: Huge gaps and market volatility
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