Monday 2 November 2020 6:11 am

How to trade your way through the 2020 US presidential election

Stuart Lane is chief executive of online trading platform Trade Nation

The US election is tomorrow, and while the world waits to see whether Donald Trump or Joe Biden will emerge victorious, traders are planning how to respond as these events unfold. 

There are no easy decisions, especially when the final outcome and the impact on the markets are this uncertain. 

However, if you are hoping to trade successfully throughout the election, these five points will help you formulate a strategy.

Read more: US election: Trumpism won the argument on US economic policy

Trade the markets you know

Markets are notoriously volatile throughout elections, so it’s very important you stick to what you know rather than trying to cash in on unfamiliar territory. An understanding of how the markets move is crucial if you’re hoping to make a profit, making this the worst time to shift to a different financial instrument you’re not so well-versed in. 

Then you need to consider what a Democratic or Republican win is likely to mean for your trade. For example, if you’re an oil trader, you’ll be trying to gauge how Trump and Biden’s contrasting attitudes to fossil fuels could affect the market.

Understand your costs to trade

Although we offer low fixed spreads, plenty of brokers will widen spreads during periods of volatility. We saw this in March and April when the Covid-19 pandemic triggered an astonishing downturn in global stock markets. Wider spreads mean higher trading costs, which could ultimately turn winning trades into losing trades once you factor in these charges. And if you’re trading on a platform with variable charges rather than fixed, it will be very difficult to calculate your trading costs and manage your risk. On top of this, some brokers may implement margin increases so you will need more money in your account to trade.

Follow the news cycle

Never underestimate the power of the news cycle when it comes to trading. Breaking news will move the markets — just a few weeks ago we saw stocks fall immediately after Trump announced his coronavirus diagnosis. 

In addition to keeping up-to-date with traditional news outlets, it’s also important to scan social media channels as this is often where stories first break (especially with a US President this active on Twitter). You may be able to use programmes to filter relevant content. Our platform includes a feature called Smart News, for instance, which provides real-time updates tailored to our traders’ market preferences.

Manage your risk

The increased market volatility means the risk will often be amplified, so it’s a good idea to take some steps to minimise your potential losses. First and foremost, consider modifying your trade size. With rising volatility, it’s sensible to reduce the amount you’re trading accordingly so you aren’t overexposed to the risk. Brokers will usually have a number of risk management tools to make use of too. For example, you may be able to place orders so you’ll automatically exit a position if it surpasses your risk appetite. This is especially important if you don’t plan to stay up all night as the results are announced.

Stick to your trading plan

To be a successful trader, you need a trading plan clearly detailing things like your goals, risk level, and entry and exit points — and you need to stick to it. The US election is undoubtedly a fast-paced and exciting time for traders, but it’s important that you remain disciplined and don’t make any rash decisions, particularly when the markets are so volatile. Remember that you’re not going to win every trade, but having a plan is key to keeping your losses minimal, and in the end, it could be the difference between a successful and a disappointing US election.

Whatever happens tomorrow, hopefully these tips will make the US election a positive time for you as a trader.

Read more: US election: Washington DC braces for post-election civil unrest

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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