How To Make Short Term Trades & Profit From Potential Wars

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Credit: www.sagu.edu

US Attacks Syria

So this just happened in the morning:

This can be seen as acts of aggression that prelude a full fledge war. And in wars, the financial markets will see a flurry of knee jerk reactions, that you as a trader, must know in order to protect yourself from such market sentiments.

The US strike against Syria happened in a tumultuous period, where diplomacy are strained, relationships between superpowers of the world – taking sides, are uncertain at best. Although the strike is nothing new, but it is Trump’s 2nd strike on a nation (first was Yemen), within his first 100 days as President. This heightens the perception of war and unrest, and what may potentially happen in the near future. 

Before you decide to act on the news, find out what happens to the market when a threat of war looms.

1. In wars, Oil prices will traditionally strengthen.

This happens for potentially several reasons. One may be that in war, oil is a valuable resource that warring nations tend to hoard. Another reason is that if the assault happened in the Middle East, which tends to be the conflict zone in recent years, it may potentially disrupt the oil producing countries’ ability to deliver oil, causing changes in supply. This strengthens the price, albeit temporarily.

Truth is now, the real reason for this strengthening of oil has now become obscure. Traders all over the world just know that this happens. They will buy into oil blindly following a confirmed strike such as this strike on Syria.

As we speak, the USOIL had spiked from $51.60 to $52.60 per barrel within an hour.

2. In periods of uncertainty, Safe Havens will strengthen

Safe havens are assets or investments that  expected to retain its value or even increase its value in times of market turbulence such as the war. There are currencies that behaves like safe havens too, namely the Swiss France, US Dollar & Japanese Yen.

Some of these currencies have already lost its status as a safe haven, but Japanese Yen had remained one of the favorites largely due to perceived stability in the currency. 

In today’s case, we see Japanese Yen (JPY) which is still very much a Safe Haven currency, strengthening across the board. Today, the JPY strengthen across board, sending the USDJPY further down from 110.96 to lowest of 110.15.

Like oil, professional traders all around the world buy into Japanese Yen instinctively when somethings of such proportion happens. During random and potentially catastrophic financial crises, known as “Black Swans”, we will also see Japanese Yen strengthening as a knee jerk reaction, potentially taking out many traders who were in position.

A potential war like this definitely counts as a Black Swan, after all only President Trump saw it coming, right?

Black Swan events is an out-of-the-blue occurrence that deviates away from the norms and is extremely difficult to predict. The Black Swan event may not be financial in nature, but affects the markets nonetheless. The phrase was popularized by Nassim Nicholas Taleb in his book Black Swan, a finance professor, writer and former trader.

3. Gold, another Safe Haven will also strengthen

Similar to JPY, Gold behaves as a safe haven which traders will flock to, sometimes without questioning. When wars are potentially triggered, we will see a spike in Gold prices as well.

Usually a knee jerk reaction, sometimes Gold or XAUUSD is more preferable to the JPY as a safe haven due to its status as a precious metal. While Japanese Yen as a currency are affected by its economy’s and the central bank’s (Bank of Japan) nuances, the Gold is a largely a stable and historically, a well regarded safe haven.

Gold shot up from 1250 to a high of 1269 within an hour today.

4. Canadian Dollar strengthens as well, but the reason may not be what you think.

No Canandian Dollar is not a Safe haven. But back to point 1 on how oil strengthens when war is looming over. Traditionally, when oil strengthens (or weaken), Canadian Dollar will follow suit (Strengthen when oil strengthens, weakened when oil price drops)

This relationship is described as Market Correlation, and Oil – Canandian Dollar is one of the most tightly correlated markets in the financial world. Currencies like this are called the Comm Dolls (Commodities + Dollars = Comm Dolls).

TRADE WITH CARE

To summarize, these periods of unrest that threatens world wars will always be part of human history. When that happens, we as traders can say with near 100% certainty that these 4 markets will see significant movements, even if they’re fleeting. But is it possible to trade them, given that they are unexpected? The answer is always yes, anything can be traded, provided that you well equipped with a strategy, a solid trading psychology and risk management. 

While you may not be able to predict these moves, notice that we describe these moves as knee jerk reactions? The opportunity may lie in the retracements in these markets, when the world recovers back to reality.

But beware, this is a scalping strategy at most and positions should not be held more than a few hours at most.

In conclusion, this article is in fact explaining what is Sentiment Analysis in Forex trading. While it may not be relevant to value investors, or position traders, it is important for Day traders, or swing traders, and even more so for scalpers.

Sentiment Analysis is not fundamental analysis, where fundamentally there is no change to the economies underlying these currencies and commodities. What changes was the perception of the market and it’s risk environment. And in that moment, billions and billions of dollars changes hands – trade smart, trade safe and don’t be on the losing end.

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At 19, JT was already a stock investor and Forex trader who not only profited from the financial markets, but also managed to pay off his tertiary education in full by putting his investing skills and knowledge to the test. JT firmly believes that investment education is the best form of post-education that accords one the power to attain financial freedom, something that he wants to empower all his students with.

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