November 02, 2020 / AtoZ Markets – With November 3rd fast approaching, we’re taking in the 30,000-foot view with Axiory’s CEO Roberto d’Ambrosio. In this exclusive interview, we hear his perspective on trading the US elections, how it’s different this year, and how Axiory is preparing.
AtoZ’s Team: In your opinion and experience, why do elections impact the market?
Axiory’s CEO Roberto d’Ambrosio: Elections are one of the most prominent events a country can go through. The outcome of which can deeply impact the priorities that the government will focus on like its social policies, taxation policies, development policies, and therefore the potential performance of the country’s economy.
Some economic sectors might benefit from a change in leadership and some might not. The specific sectors and overall growth depend largely on the policies a single government will enact. Of course, elections in some countries have a large impact, well beyond their borders, as is the case in the upcoming US election.
All of the above examples have short-term implications for the markets, as well as medium to long-term consequences.
Around election day, financial markets experience a surge in volatility, the size of which depends on the level of uncertainty around the election outcome. Some sectors, or even single stocks, can experience huge swings in their market value.
Currencies are of course also affected. The home currency usually gains or loses value rapidly intraday, creating both risks and opportunities for market participants.
AtoZ’s Team: Is there a distinct difference between being a trader during elections and being a broker’s CEO during the elections?
Axiory’s CEO Roberto d’Ambrosio: Usually, traders and brokers are seen to be somewhat on opposite sides.
My opinion is that both face the same variables and need to properly manage them, those variables being market volatility and liquidity. Both brokers and traders need to address the situation in order to manage the related risks appropriately and therefore be as efficient as possible.
My approach to building and developing a broker is to have a partnership with the traders, making sure that what the brokers do is provide a safe, stable, and reliable trading environment to its traders.
At the same time, brokers need to take on the responsibility of keeping their traders informed and properly train them to tackle the risks that different market cycles may produce, to allow traders to take advantage of market volatility, increasing their probability of success whilst managing their overall risk appropriately, with specific reference to carefully sizing their trades and overall exposure.
Both traders and brokers need to adapt their approach to the way they manage their exposure and ensure it aligns with their risk appetite and tolerance.
Traders must recalculate the exposure of their overall trades in terms of money management, risk management, and, even more importantly, position sizing.
Brokers need to have an even closer relationship with their liquidity providers, to be able to adapt their margin levels promptly and make sure they deliver prices consistently, even during extreme volatility.
This is quite a complicated endeavor, but it is in this kind of situation where dealing with the right broker can make a real difference. At Axiory, we pride ourselves on being extremely careful in remaining proactive rather than reactive, by stress testing well in advance and having every measure in place to appropriately tackle even the most challenging conditions.
AtoZ’s Team: Are there lessons to be learned from past elections, or should we look at each election as an isolated event?
Axiory’s CEO Roberto d’Ambrosio: Of course, each election is an event of its own, happening here and now and therefore, by definition, under unprecedented conditions. However, there are some constants that carry lessons to be learned.
But there are a few general constants when it comes to elections that can drive our analysis and consequent decisions.
One constant thing is that financial markets dislike uncertainty. Uncertainty also negatively impacts risky assets like stocks. There is nothing that creates more uncertainty than a contested election.
The probability of it before the election, for example, if the polls produce unclear or mixed results, would produce a surge of short term volatility with huge intraday swings, mostly in the direction of stocks losing value and traders and investors unloading risk assets, rotating to less risky assets like quality bonds, “safe haven” commodities like gold, or even cash, with a preference for currencies considered more resilient in times of crisis, like USD or the JPY.
Should the election result really be contested, then the implication can be relevant.
Just consider what happened in the last great contested election, which needed a vote recount: the US Election in 2000. Republican candidate George W Bush and Democratic candidate and incumbent Vice President Al Gore ended up in several weeks of legal actions that required the votes to be recounted.
At the time, volatility in the market surged, negatively impacting a market that was already showing signs of the .com bubble being unsustainable. In my opinion, that is what constituted the starting point of the bubble’s burst.
Therefore, the lesson learned is that elections can have a decisive impact on the financial markets both in the short-term and the medium to long-term, with a deep impact on the volatility structure and therefore the risk/reward structure of the financial markets.
AtoZ’s Team: How will COVID effects on the market influence the way the market reacts to this year’s US election?
Axiory’s CEO Roberto d’Ambrosio: The Covid situation is underlying the US election, spreading its consequences on the financial markets irrespective of the outcome of the election itself.
Of course, any good news or bad news (pandemic revamp, news on a new vaccine likely to be released, etc) may impact the forecast regarding the outcome of the election, as part of the strategy Democrats are using is to hit back at the Trump administration for the way they are handling the pandemic.
Still, the thing to look at is the impact of this kind of news on the polls: predictability and certainty are key to the financial markets so the wider the distance between candidates, no matter which of them is in the lead, the more the markets will cheer, and volatility will decline, with risky assets being bought.
AtoZ’s Team: Can traders ‘prepare’ for the US election? And if so, how?
Axiory’s CEO Roberto d’Ambrosio: Of course, they can, and they definitely should. They should look at what we know, which is that volatility will rise and therefore our money management must change.
Liquidity might get very thin in and around the election days and the overall risk will rise, requiring larger stops. The consequence is that the size of each trade must be recalculated to keep it consistent with the risk appetite and tolerance which every trader should establish.
Existing positions should also be revised, making sure they are not too exposed should sudden large adverse market movement negatively impact the portfolio of trades, thereby creating a problem on the amount of available margin in the trading account.
AtoZ’s Team: How is Axiory preparing to support traders during the US election?
Axiory’s CEO Roberto d’Ambrosio: Axiory is all about supporting its clients especially when they need it the most, and the upcoming elections in the US is one of those moments. Our support teams will be deploying all their resources and we’re increasing the number of units to cover all the shifts.
On the liquidity side, Axiory enjoys an excellent relationship with its liquidity providers and is in constant contact with them to evaluate the market depth and level of margins. Our own analysis team is constantly checking market conditions and continuously passing on any relevant element or a possible risk to the management team.
AtoZ’s Team: Lastly, as a trader yourself, are you looking forward to the US election?
Axiory’s CEO Roberto d’Ambrosio: Of course, I am! Every active trader is looking forward to market conditions in which volatility will rise. But, of course, opportunities must be managed in accordance with the increased risk they carry.
For every trader, money management is key, no matter what their strategy is for entering the market. The most important part of it is to set when you exit a trade that is not going in the right direction, by detecting the levels that would confirm the exit, and then size your entry according to the size of the stop, to be consistent with the risk management rules.
If a trader is able (and strong enough) to do this, then his/ her path to successful trading is set on a strong foundation, and profitability, in the long run, is assured.
The Axiory brand was launched in 2011 and has since become an industry leader serving traders around the world. The broker has created a savvy, friendly, and intuitive space for accessing the forex and CFDs market, where clients’ needs always come first. Axiory traders have access to excellent trading conditions, unique risk management tools, tier-1 liquidity, and the constant support of an international, highly professional, and extremely friendly team, under an IFSC licensed broker.