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How to Trade the U.S. Presidential Election, Pt. 2

It's Time to Think Outside the Box
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Market Wizards by Jack Schwager

Market Wizards by Jack Schwager

In the classic trading book Market Wizards by author Jack Schwager, there's an interview with a legendary trader named Bruce Kovner. According to that book, over one ten-year period, Kovner achieved an 87% average annual compound return. 

                                 Here's Part 1 of How to Trade the U.S. Presidential Election

If there is one thing that sticks in my mind about Kovner's Market Wizards interview, it's the following quote:

From Market Wizards: Bruce Kovner Interview with Jack Schwager

From Market Wizards: Bruce Kovner Interview with Jack Schwager

"I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen."  - Bruce Kovner

This type of visualization can be very helpful to a trader - particularly in times of high volatility. It's useful because we're all biased toward prices we've actually seen. It's harder to imagine something we've never seen before, and believe it's really happening. 

Try this exercise - imagine crude oil falling to $20 per barrel right after the election. Now imagine it rising to $100 per barrel. Now try to imaging both of these things happening, within a short period of time. 

Next, do it with a stock. Do you have the ability to imagine Apple falling to $60 after the election, and really believe it can happen? Or perhaps you can imagine Apple rising to $160? Now try to imagine both of these things happening in quick succession. 

U.S. Dollar Index chart via TradeStation

U.S. Dollar Index chart via TradeStation

Why is it important to visualize unlikely events? Take a look at one market's reaction to the 2016 U.S. Presidential Election. 

On Election Night, there was a massive drop in the U.S. Dollar Index. However, that index quickly rebounded. The dollar went on to close higher in the next seven consecutive sessions. 

It's safe to say that not many people saw that move coming. That's also true for dozens of similar moves that occurred. That's why its important to visualize things you've never seen before - just like legendary trader Bruce Kovner. 

See you tomorrow for Part 3...

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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