How to Trade the U.S. Presidential Election, Pt. 3
This year's election promises to be like no other. We might not know the result for weeks, and it's possible that both sides will declare victory. With all this uncertainty, there's one thing that we do expect, and that's volatility.
In Part 1, we learned to let go of any bias regarding our beliefs about the election, and the market's reaction to it. Then in Part 2, we learned how to visualize major market moves before they happen. Today in Part 3, we're going apply these concepts to the 2020 election.
We don't know which direction markets will take, but we do expect high volatility. Emotionally charged situations, like Brexit and the 2016 U.S. Presidential Election, lead to emotionally charged markets.
How do we trade wild, multi-directional swings? I'm going to use Apple as an example, but the following technique can be applied in any market. Let's create a hypothetical trading situation.
We'll assume it's the morning of November 3rd. It's Election Day. Markets are quiet, but it's the calm before the storm. Apple is trading near $125, as shown on the chart.
Let's also assume we want to buy 200 shares of Apple. Here's one way it could be done. Instead of placing one buy order for $200 shares, we could create a staggered entry system, using three entries.
At point A, which is the 50 day moving average in blue, I set up an order for 33 shares at $116. IF the price continues to fall, I have a buy order for 67 more shares at the 200-day moving average, near $87, in red. That's point B.
I have a third order way down at $60, because that's an area of significant support, shaded in yellow. If all three orders are hit, I'll have 200 shares at an estimated average price of around $78. If that market makes a wild swing in both directions, those shares could quickly become profitable.
What if only two orders execute? That's potentially good news too, because it could mean the price has already turned and has started to move higher. You now have 100 shares at an estimated average cost of $97.
Notice how we're spreading our entries very wide. This is not the same thing as adding to a losing trade. We are carefully planning a staggered entry long before the trade has even begun. This technique is specifically designed for high-volatility event trading.
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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here