Market Always Knows Better, or the Lessons We’ve Learned from the US Presidential Election
Interview with Christala Parmaxi, CFTe, Harborx Investment Analyst
The US Presidential election result may have come as a surprise to many, but if there’s one thing that financial markets teach us, it is ‘expect the unexpected’. We sat down with Harborx Investment Analyst Christala Parmaxi, CFTe, to discuss how the forex market handled the US elections, the scenarios of ‘Trumpflation’, and the difference in trading approaches of amateurs and professional traders, as both of these groups actively trade on Harborx, the only CySEC investment firm that provides a fully fledged mobile-only currency trading solution.
‘It’s not over yet, and markets could surprise us…’
-There had been a lot of talks about market going into frenzy if Donald Trump gets elected. And while there has been some volatility during the voting, the markets seem to have recovered. Is it true?
-It is true that the markets overreacted during and after the elections since the magnitude of the volatility was similar to the one we experienced back in Brexit time. Even before the elections, the market was anticipating every clear hint of the winner by moving accordingly. The market revealed us the manner by which it was reacting to Clinton’s or Trump’s election, showing us the currencies and asset classes that were favored by each nominee. Donald Trump was ahead of Hillary Clinton during the voting process, and markets reflected this in many ways, some of them were the falling commodity currencies, the rising safe haven assets and the falling Mexican Peso. What really surprised us was the immediate reaction of the market to the result and to the first speech of Donald Trump. It was like the market immediately digested Trump’s election and moved to the opposite direction, where it is still trading in some of the cases. The recovery is yet a long shot scenario since Trump’s election is a great source of uncertainty and it will take a big shock and more time for markets to move to the opposite direction. It all depends on the decisions that will be taken from now on from the new governmental body and if we think of Donald Trump’s words, it will also depend on the new fiscal changes that he promised during his campaign.
-So does it mean that many market analysts were wrong in predicting worst case scenarios that would follow Trump’s victory, or can there be any surprises? After all, we have months before the inauguration.
-Nothing is over yet, and there are several possible scenarios. On the one hand, there was the unexpected immediate digestion of Trump’s election by markets. On the other hand, there is the uncertainty of, if and which, out of all those promises will Donald Trump apply. The first event to be watched is the Federal Reserve’s next move. The Fed avoided increasing the rates within the year so that they do not overheat the economy, now that the President-Elect has other plans the Fed will think twice of how many times to increase the rates in 2017 or even in December as it was widely expected before the elections. Moreover, Donald Trump is going to give some interviews and speeches before the Presidential inauguration, we may see some of his views there and markets could surprise us again. But that’s the magic of the forex markets!
-As an investment analyst, was there anything that surprised you during this election in how the markets behaved?
-I didn’t expect the immediate digestion of Donald Trump’s win from the main currencies such as Euro, Great Britain Pound and the Japanese Yen. Of course I didn’t expect Trump to talk about a “united nation” right after his election! It is indisputably the strongest US Dollar story for a while. The change of the direction of those currencies (EUR,GBP, JPY) is obviously due to a strong Dollar. After all, the priority of the President-elect is not for the rest of the economies to get stronger but for the biggest economy of the world to regain the strength it once had. With all those plans that Mr Trump has in mind, the US economy can grow stronger. The media calls market reaction to the election of Trump as “Trumpflation” due to his plans that are likely to affect US inflation. Of course there is the topic of economy overheating that comes in mind thereafter, but it is too soon to speculate on this before Mr Trump’s inauguration.
-What are the most vulnerable currencies at the moment? What should we keep in mind?
-The market was moving, is moving and it will be moving according to the President-elect plans, and from January on, when these plans are implemented. Donald Trump referred many times during his presidential campaign to Mexico and China and then to Ford cars and Apple. He also promised to add a significant number of jobs in the US economy and achieve one of the longest lived economic expansions since the World War II. I clearly see that the US Dollar is likely to be affected the most, most probably positively at the beginning due to the promised economic growth of Mr Trump. However, we are in a time where the US employment is almost near the full employment and such fast growth may end in creating gaps that can not be filled easily. The Mexican Peso has been suffering for months now, since the President-elect has been against Mexico from the beginning of his campaign. It is currently recovering for the last few days but it has reached significantly low levels. Trump has called China to be a currency manipulator and he seemed ready to open a trade war with China and other countries such as Canada. The Chinese Yuan and Canadian Dollar are also vulnerable to Trump’s next moves with the first running at 6-year low and the second at 9-month low against the US Dollar. Of course, if Donald Trump does not keep the same aggressive stance during his Presidency, those currencies are expected to benefit from it and rise back to normal levels.
-In a bit over a week since the election results, we have seen Donald Trump soften his stance on many of his campaign claims, especially most controversial ones, such as building the wall on the border with Mexico and repealing ‘Obamacare’. Furthermore, many of Trump’s promises have been deemed unrealistic. How confident are you in analyzing Trump’s plans when sometimes it’s not clear what these plans are, at all? It is fair to say that market knows better than all political analysts combined?
-One of the basic principles of Technical Analysis is that “market discounts everything”, which means that the price of financial instruments reflects all known and available information. Technically, you can see all the available information including fundamental news on charts and thus you already know that the market is moving according to political situation and without even studying the news you can confidently assume what happened just by looking at the price reaction.
There are indicators representing the news and the market sentiment, but still, the technical analysis indicates that price is the most reliable indicator out of them all. So, yes, it is true that the market always knows better than anyone else. Regarding the analysis of Mr Trump’s plans, the appropriate procedure for every rational analyst would be to create several analysis scenarios and export conclusions and strategies according to every single scenario out of them. Thus, I feel confident and excited applying each appropriate scenario every time that Mr Trump announces a different view. It is an uncertain world and an uncertain market which makes market participants even more excited for trading!
‘The majority of retail traders gamble…’
-As you watch Harborx figures, was anything different in the traders’ behavior during this election campaign?
-The vast majority of retail traders like to gamble under such circumstances. By gambling, I mean entering the market before the result is announced yet holding the belief that Clinton or Trump is going to win. This can be done with the appropriate loss protection levels and rational strategies, and sometimes leads to enormous gains. However, most of the traders do not set their strategies properly and they end up in losses due to the high volatility and spikes of the market during significant events. I can say that most of Harborx Star Traders have handled this election well, by avoiding gambling and trading properly for themselves and their followers, which makes me proud of our team and the high quality product that we offer to the public.
‘Behavioral trading is the worst type of trading for such situations…’
-When crucial international events like this election happen, and it’s not clear which way the situation and the markets will go, what are the most common mistakes traders make?
-Traders always want to take the ultimate benefit out of the announcement of every single event. Behavioral trading is the worst type of trading that a trader can adopt during such significant events and high volatility. Losing your rationality and gambling under high volatility conditions usually ends in big losses and unfortunately bigger than someone can take. First of all, a trader needs to invest an amount that he/she can afford to lose. Many traders look at such volatile conditions as a chance to reach big gains and they are getting greedy. Greediness is a trader’s worst ally. Traders are going blind when they see profit on their account and they usually go for more, going against their initial trading strategy; and this is where they are losing control and end up in losses. The best way to behave in such circumstances is to prepare a trading strategy that adopts to all possible scenarios and stick to it instead of changing your view according to any other factors or the strategies of other traders.
-Harborx is a fully fledged mobile-only trading solution, and your client base represents a diverse mix of curious beginners as well as professional forex traders with different levels of experience. Do you see any differences in how they behave?
– These are two completely different trading approaches, and their mentalities couldn’t be any more opposite. Usually the beginners make the mistake of trading emotionally. For example, the vast majority of the pre-elections polls predicted the victory for Hillary Clinton. Many beginner traders gamble in the way that they opened market positions in favor of Clinton before the announcement and thus they ended up in big losses. Many beginners rush into placing their positions instead of taking their time and waiting it out. In comparison, some professionals took benefit of the volatility and ended up in big profits by waiting to see the market reaction during elections and not trying to predict the result and trade on their personal beliefs.
The greater example that we could take for a professional investor is Warren Buffet; he ended the Election Day around $3 billion richer since the market moved his way even that he was a supporter of Hillary. To be clear, I am not saying that professionals by rule end up in profit and beginners in loss during high volatility market conditions. Instead, we cannot really compare them.
-So how do you counter this challenge in Harborx? After all, your mobile app caters to both groups of traders.
-In Harborx we provide our clients with a great advantage. Our Star Traders are there to help the amateur traders; by just following the experts the clients do not have to worry about their open positions and watch them all the time since the Star Traders are doing it for them. I am happy to see that both of Harborx traders, professional and beginners, follow the Stars. Some others, mostly the ones with highest levels of experience, prefer to trade themselves since they feel more comfortable relying on themselves. From what we see on the app, the trend is that amateur traders follow the Stars and professionals trade in both ways, and we’re proud to be accommodating the needs of all our traders.
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