5 Lessons In Trading from the 2016 US Presidential Election

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No matter where you are in the world, you probably have followed along to some extent with this year’s US presidential election. On Tuesday, November 8th, the world was stunned when Hillary Clinton didn’t win the electoral vote. She was widely projected to win by both the media and the oddsmakers in Vegas. In fact, she was expected to win by a landslide. So when Donald Trump took a shocking majority of the electoral college votes, most people were fairly flabbergasted.

This is not going to be a partisan post; I am not here to talk about politics. But I do think that there are a few lessons in this strange story for binary options traders:

  • 1. Sometimes the last thing anyone expects actually happens.
  • 2. Context is complex.
  • 3. It is important to get out of one’s own echo chambers.
  • 4. Determining the meaning of market movements is a challenge.
  • 5. You should always expect volatility when trading the news.

There is quite a lot to say about each of these, so following is my analysis.

 

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1. Sometimes the last thing anyone expects actually happens.

I cannot recall the exact odds that I saw quoted for the election in the weeks leading up to it, but I seem to recall something like 6/1 odds for Trump. In other words, for every $1 you bet on Trump, you could have won $6. If you tried to bet on Hillary, you would have to wager $6 just to make $1.

Basically, the odds were such that it was almost pointless to wager on Hillary. The bookies were so convinced she would win that they set the odds to the point where it would be very hard to pull in a good profit if you bet on her. They needed to discourage people from wagering on such a heavy favorite.

Needless to say, anyone who actually did bet on Trump has pulled in a tidy profit.

Oddsmakers are smart people. They do a lot of research when they set up their odds, because they need to try and structure them in such a way as to profit off of other peoples’ bets. But even they could not imagine all the possibilities.

Sometimes in sports betting, punters talk about what they call a “lock.” A “lock” is a bet which is supposed to be so sure that you cannot possibly lose it. Most punters would have called a wager on Clinton a lock.

I talk quite a bit about looking for what I call “A+” trades in binary options. These are trade setups which so perfectly meet your criteria that if you were to give them a grade, they would get an A+.

But I never would call any trade a “lock,” even a perfect A+ trade.

What happened with the US election is a great reminder that “locks” do not exist—not in sports betting, not in world events, and not in trading.

If you bet solely on A+ trades and ignore inferior setups, you are playing only your best hands, and most of the time, you should end up winning your trades. But no system is perfect, and once in a while you will lose a trade which should have been a winner. Sometimes, looking back you will be able to identify what went wrong, but other times, you may never figure it out.

The bottom line: A+ trades are always the way to go—but now and again, you are going to lose one. So never take anything for granted.

2. Context is complex.

On that note, context is extremely complicated—and quite often that is where we make mistakes that cost us trades. We think we have a perfect setup, but we are ignoring the fact that the setup’s location is less than ideal.

Ever since November 8th, pundits and political analysts and the general public have been struggling to figure out exactly how Trump could have won—and moreover, how everyone could have been so mistaken about what was going on in the US and the world at large.

Obviously there are contextual issues which were not fully understood, and still are not to this day. To some extent, some of these have been pieced together in the time since election day. But to a larger degree, the contextual factors surrounding the surprise election result are still mysterious. In particular, we are not sure how the US election fits into the broader global picture.

If you actually are trading economic events using fundamental analysis, an understanding of the complexity of context is an absolute must. In fact, a lot of binary options traders did trade the election (for example by taking a High/Low position on the value of USD, wagering that it would go up or down based on the outcome of the election).

Many newbie traders in particular make the mistake of thinking that they have a natural grasp on economics, geopolitics, and the myriad other factors which can play into trading context.

But even world-class economists and political analysts failed to see the full context surrounding the US election, and managed to call it completely wrong.

If there is anything that should give you some perspective when it comes to your own understanding of the market, it should be a situation like this. If world-class analysts were unable to understand the context of the election, why would you expect that your own analysis would be complete?

This all applies (to a lesser degree) with other types of trading too. Even if fundamental analysis plays no role in how you trade, technical analysis and price analysis still entail an understanding of context as well. This includes (to some degree) your awareness of world events, but also the information which various lines and indicators on your chart are giving you.

Many traders have a hard time with this. They might see a perfect price formation, but completely miss the contextual clues on their charts telling them that this formation may mean something different than what they expect.

The bottom line: If we understood everything about the context of the US presidential election 100%, maybe we could have predicted the outcome. But the context eluded even experts, which demonstrates how complicated economic and geopolitical situations can be. These contexts affect trade outcomes as well, and however strong you think your understanding is, it is easy to miss out on what is really going on.

3. It is important to get out of one’s own echo chambers.

There is a phrase which has been bandied about since the election which you may have heard: “echo chamber.”

This is a media term, a metaphor for the way in which our belief systems are constructed and reinforced.

The most prominent example of this pertaining to the election concerns Facebook. Since the 8th of November, analysts have discovered that FB contains fake news in abundance, and that those fake news headlines spiked leading up to the election.

Many people get their news exclusively through Facebook, and as a result, never actually saw any real news in the days and weeks preceding the election. This may have had a profound influence on the vote.

There is another example of an echo chamber which I have not heard a lot of people mention however, and that is Donald Trump.

Trump has lived a life of luxury, and because of that, his experiences have been cloistered. If you watched the debates, you might remember him mentioning a “small loan” from his father. I have seen multiple figures quoted, but most prominent news sources seem to indicate this small loan was around $14 million.

It is impossible to say whether Trump really believes that $14 million is a “small” amount of money or not, but his statement does reflect how out of touch he is with the reality of the average person’s life.

For most of us, $14 million is simply a huge amount of money. But because Trump has lived inside the echo chamber of his own wealth and privilege, he has no conception of what life is like outside that bubble.

As a binary options trader, it is important to analyze the ways in which you may also be standing in a bubble. Here are some questions to ask yourself:

How do my assumptions about wealth influence the way in which I manage my money? When I trade $20, do I consider that a “little” or a “lot” of money? What might that same amount of money mean to another trader? What does it represent in terms of potential? Do I ever take my own money for granted?

Where am I getting the news that I use to analyze the markets? Do I get everything directly from my broker? Do I check only major media sites? Traditional newspapers? Niche publications? How partisan is that news? Am I getting the full story?

What are my assumptions about trading? Where did they come from? Do I spend all my time on the same trading forum or reading the same thread? What is the background of my trading coach? What are his echo chambers? Have I inherited his assumptions? If so, are they helping me, or hindering my progress?

When we become convinced of a certain belief about the market, about the global economy, about trading, money, or even ourselves, we often do not think twice about how that belief evolved, or whether it holds up to closer scrutiny. We continue to live inside our own bubbles, allowing echoes to fashion our beliefs.

Regardless of your feelings about the outcome of the election, one thing is clear: echo chambers limit our broader perspective and understanding of events. They cloud our view of context, having a profound influence on our decisions.

The bottom line: As traders, we all have our own echo chambers. Figure out what your assumptions are and where they come from. Challenge yourself to look at fresh perspectives and to broaden your intake of information. It could make you a more profitable trader.

4. Determining the meaning of market movements is a challenge.

It has been a bumpy ride in the stock market this November. If you follow stocks, you probably remember that they jumped on November 7th when Clinton was cleared again by the FBI. This seems to indicate that Wall Street was optimistic that she would be elected.

On the night of November 8th however, when Trump was elected, the stock market plummeted.

But what really shocked everyone was what happened after that. Under 24 hours later, the stock market not only recovered, but it closed almost at an all-time high. Since then, the market has continued to soar.

So this poses a big question—or several. What happened? Why was there such a quick turnaround? If Wall Street was backing Hillary, why are they now behind Donald? What does it all mean? Will it continue?

Plenty of theories have abounded. The market’s optimism may point toward a hopeful vision of Trump’s presidency. But many experts caution that the stock market boom may have nothing to do with who won the election at all.

This has been the most contentious US election in modern history, and right now, there is a huge amount of turbulence simmering under the surface of American politics and day-to-day life. The polarization is deepening, and in many ways, there is a divide running through the populace. In a way, there are two Americas.

For that reason, it has been surprising just how smoothly the transition has gone. Everything on the surface has had an appearance of normalcy to it. The election was gracefully and swiftly conceded by Clinton, and Trump met with Obama in the White House.

For many people, this is a major relief. Even though the issues boiling under the surface are still there, normalcy is reassuring. Most people do not handle loose ends very well, and right now, they appear to be tied off—at least for the time being. This sense of resolution alone could explain the stock market rally.

So what does that mean for the future? At this time, it is too early to say. The president elect is wildly unpredictable, so attempting to make predictions about his impact on the stock market right now would be incredibly difficult. Again, just consider how hard it is to interpret what his true impact is right now.

The bottom line: Avoid jumping to snap judgments about the meaning of market movements. Numerous factors are at play. The ups and downs of the market sometimes are a simple, direct reflection of events, but other times they reflect finer nuances of emotion. We do not yet know what Wall Street thinks of Trump, or what effect a Trump presidency will have on the market. We only know that Wall Street appreciates the smooth, regular transition of power.

5. You should always expect volatility when trading the news.

Finally, this is a great moment to iterate a basic reminder, which is this: big events in the world generate volatility. Quite often, that volatility is a temporary spike or plunge, followed by recovery in the market. Sometimes a new trend is spawned, while other times the market consolidates. Either way, being caught up in that initial rush can result in some crazy unpredictability in your account.

If you were actually in a trade on the night of November 8th, you might have been caught in that temporary plummet. Depending on your position, you might have profited or lost. Either way, it happened fast.

Unless you performed a careful analysis and had a solid reason to be in that trade at that moment, you would have been playing with fire to have any position open that night.

A lot of traders lost money unnecessarily that night, simply by exposing themselves to that downward spike of volatility. If those traders had simply held off until the next day to trade, they would have found themselves with a far more stable, predictable market.

This is why I recommend avoiding trading news events unless you actually know what you are doing. And as I have hopefully elucidated through this post, it is quite a challenge to really understand economic and political factors.

The bottom line: If you do not have a solid handle on fundamental analysis, simply hold off trading during presidential elections, economic report releases, and other major events. Get back in the game when the market is more stable.

Conclusion: The World is Complicated … So Is Trading

Whether you were backing Clinton or Trump in the 2016 US presidential election, you probably were pretty shocked by the outcome. No matter what your political beliefs and no matter where you get your news, hopefully this unusual event in American history has given you perspective on some of your own echo chambers and assumptions, and helped you to realize just what a complex and confusing place the world can be.

The next time you look at your charts or a news headline and are tempted to look only at the surface, dig deeper—you may be surprised by what you find. And it could just mean the difference between a profit or a loss.

*what’s up with that frog?