Election Trading: How I research and prepare

The US election results are a couple days away and so with it comes along lots of opportunities in the financial market. My trading career so far as spanned almost 9 years now and so with it I have faced a few elections that has shocked the financial markets. One being BREXIT and the other being the 2016 US Election. Both these has one thing in common and that’s essentially “surprises”. Britain wasn’t supposed to leave European Union and neither was Trump supposed to win 2016 based on the opinion polls.

For any successful trader the key is preparation or homework. Like learning maths in school. You have to do homework and work on the problems day in day out and that’s the only way you can succeed in Math. Make sense why many children under perform in Math or why they hate it. Because there is a continuous pursuit. It’s not memorization like other subjects.
Homework or preparation is essentially one of the way I’ve succeed in financial markets. I have tons of folders and files of markets impact on different scenarios that I’ve collected over the years which in turn is the foundation stone of my trading. I believe many traders especially the newbies lack this acumen. They’re obsessed with making money but not obsessed with the research and homework. Which reminds me of my favorite football player during my younger days Steven Gerrard said about succeeding in football. You have to “Obsessed”. “Obsessed to be the the best player”. YouTube it!. I guess in competitive world you have to obsessed. You have to be obsessed to be good in your field. Doesn’t matter what the field it is. Whether it programming or engineering or politics. If you’re not obsessed in being the best, you wouldn’t put in the work necessary to be the best. Success and trophies and money comes later on.

Today I thought I’ll just go through how I approach an event like this and how I would like to trade it. You will be surprised how I go through every single minutiae and also look into my brain on how I think.

I’ll first start with the impact on who wins. So basically Biden has called for higher taxes for corporations and high income individual’s. This is not good for the markets. But history has taught us change in governments creates a minor setback for the stock but it rises back eventually. So I can expect a temporary crash if he wins. Trump on the other hand is expected to keep the taxes the same as of now. So that essentially is good for the equity market. Now let’s think of other news variables. There has been lots of discussions that Trump might not concede. What are the implications of that? Will there be civil unrest? There are also talks of National Guard being deployed to counter the unrest. Will Court’s intervene. All this can affect the markets in negative way. So massive volatility is expected. So scenarios are as follows.

IF trump wins

Market rallies
IF civil unrest-National Guard deployed
Market crash until things settle down

IF Biden wins

Minor crash in the market but its rallies eventually based on historic analysis
(how many days it takes is questionable, but this problem can be fixed by analyzing technical areas of the market)

If Trump doesn’t concede

Crash in the markets, massive chaos and volatility expected
Eventually market will rally when things settle down

Other variables to think about is the nth wave of COVID. Will there be lockdown again? Britain has already announced a lockdown. Will there be another one in US? Is the new president pro lockdown. But these are more longterm trades. I’m here to trade the event specifically and the event here is Elections.

Now since I’ve prepared the possible scenarios. I know when to SELL or BUY. Im prepared for any news events. Im not trading blind. But obviously there are things outside these scenarios like an asteroid striking planet earth or World War 3. But then what’s the point in me trading that if I’m not going to be alive.

Looking in to areas that I would like to trade in the S&P which some people call as technical analysis. Post the covid crash the market has risen sharply. This is something that I’m skeptical about. The aggression could be interpreted as retail traders entering the markets aggressively thinking it’s a great opportunity to buy as the market is cheap. But have they prepared for the US election? Will they be panic when the market starts crashing at fast pace going down 20-30%? This panic could make the sell even more aggressively which would in turn create more sell orders and then put the market down further.

Looking at the SPY chart at the moment, the market is trading at 326 on Monday 2nd of November. The market has been trading at a consolidation past 3 months. The bottom of this consolidation is 319.80 which is the line in the sand. A break of this down could trigger massive sell orders from many traders out there. This of course will happen if any of the negative news I discussed above hits the markets during election day. I would be using this line as a reference point. Once the negative events do settle down, I would again use this same reference level as entry. If the markets comes back into this level after sell off then this level would be the area I would be going long.

There is a chance that market doesn’t even test this level which I do reckon is extremely unlikely as negative news is expected but just in case lets say everything goes peacefully and market goes up, my reference point will be 340 if the markets enters 340 I would be going long. The other scenario which is again super unlikely is that the market trades between the 340 and 319 area. If it does that I won’t be placing any trades.

So to conclude my technical analysis

IF Break below 319.80
Confirm bad news
Go Short

IF markets rises back in to 319.80 after break down
Confirm news have settled down
Go Long

IF Break above 340
Confirm no bad news
Go long

IF Market trades between 340 and 319.80
No trade(doesn’t matter what the news is)

The execution and risk management is more of an elaborate discussion which I honestly don’t have the time to write. I will be trading the E-mini S&P 500 Futures to make my trades. I will be aggressive on my exits based on the fluctuating news and sentiment of the markets. I’ll be working around these levels with strict risk reward ratios. I won’t be risking a lot in these trades because the risk of fluctuations is also more. The exchange will shut down the market if there is limit up or limit down scenarios. Margin requirements has also been adjusted by the brokers. I will also be preparing psychologically by doing visualizing exercises of all this scenarios so I don’t have a palpitation when the even actually happens. All these are again major discussion that needs a bigger explanation. I think the article is long enough so I’m going to stop here.

I hope you understood the gist of how trader thinks and prepares for events like these. If a trader is willing to do these kind of homework he will make some money or at least not loose a lot. As Benjamin Franklin said “If you fail to plan, you are planning to fail”.