The forex market has always been malleable to a number of different factors, but its sheer level of sensitivity appears to have been amplified over the course of the last decade.
This has not only translated into far greater levels of volatility in the forex market, but it arguably highlights the way in which forex assets remain vulnerable to geopolitical events and relationships.
One of the factors that make political risk so dangerous is the limited availability that you have as an investor for pricing it in. So, while the market has no political affiliation or leaning, it’s directly impacted by everything from monetary policy and trade flows to international conflicts.
But how does politics impact forex, and how can you negate them as a trader? Let’s get into it!
Are Political Factors More Telling Than Macroeconomic Alternatives?
There are two broad categories of factors that impact forex pricing, namely those that are macroeconomic and non-macroeconomic alternatives.
The latter include political events, policies and relations, along with acts of terrorism, natural disasters and widespread investor speculation.
As for the former, this category includes interest rate hikes and changes in the prevailing inflation level, along with real-time trade balances, government trade levels and the trade flows that exist between nations.
But which set of factors is more impactful? Well, macroeconomic events tend to have a much more significant, but short-term, impact on affected currency prices, whereas political factors tend to be more drawn out, much less predictable and capable of negatively affecting currency values for an extended period of time.
Complex geopolitical issues can also involve multiple countries (either directly or indirectly), affecting a particularly large number of currency pairs and the overall balance of the FX marketplace.
This insight will mean alternative things to different people. For example, scalpers (who execute a high volume of orders within a short period of time and may only keep positions open for a matter of minutes) will be heavily impacted by macroeconomic factors, whereas they can largely resist slow-burning geopolitical events or even leverage these to their advantage.
Conversely, swing or position traders (who adopt a much longer-term outlook) can largely ride out short-term macroeconomic events, although they’ll have to factor in certain geopolitical outcomes to their wide trading strategy.
How to Trade Politics and Geopolitical Event
The question that remains, of course, is what steps can you take to effectively trade geopolitical events while optimising your profitability? Much will depend on your wider trading strategy and outlook, of course, but here are some steps to help you on your way!
- #1. Understand the Relationship between Geopolitics and Macroeconomics: As we’ve already touched on, geopolitics and macroeconomics are heavily interlinked, particularly as governments will often respond to the impact of war or reduced trade flows by adjusting their monetary policies. These policy shifts will be widely publices and backed up economic calendar events and data updates, which can be pre-empted in some cases and used to inform your FX strategy. This way, you can indirectly trade geopolitical events in a more risk-free manner, arguably minimising your prevailing level of risk in the process!
- #2. Leverage FX Trading Software: We live in the age of automated trading, where roboforex software is widely deployed to optimise your output and volume without compromising on the accuracy of each individual trade. While you can set the parameters used by forex robots and create software that reflects your wider investment strategy and goals, the program itself handles execution. At the same time, you can utilise so-called “stop losses” to automatically close positions once a predetermined level of loss has been incurred, safeguarding your capital in a harsh and often challenging marketplace.
- #3. Recognise the Broader Unpredictability of Geopolitical Events: As we’ve already touched on, geopolitical factors are much harder to pre-empt, both in terms of their timings and impact on the marketplace. While scheduled elections can buck this trend, wars and trade conflicts can progress in any number of ways and over an indefinite period of time, and you’ll need to factor this uncertainty into your strategy. This may mean that you take a more risk-averse approach when trading geopolitical events, or at least conduct more research into precisely how you’ll invest your cash.