We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Oil - US Crude
Bearish
Wall Street
Bullish
Gold
Bullish
GBP/USD
Mixed
USD/JPY
Bullish
More View more
Real Time News
  • Commodities Update: As of 10:00, these are your best and worst performers based on the London trading schedule: Oil - US Crude: 1.18% Silver: 0.00% Gold: 0.00% View the performance of all markets via https://www.dailyfx.com/forex-rates#commodities https://t.co/lgnQTs4F8U
  • Forex Update: As of 10:00, these are your best and worst performers based on the London trading schedule: 🇬🇧GBP: 0.18% 🇨🇦CAD: 0.17% 🇪🇺EUR: 0.15% 🇯🇵JPY: 0.06% 🇦🇺AUD: 0.06% 🇳🇿NZD: -0.10% View the performance of all markets via https://www.dailyfx.com/forex-rates#currencies https://t.co/Tu1NZZUBBo
  • The $USD suddenly seems scarce amid the #coronavirus outbreak. That threatens short-term financing underpinning global supply chains, despite the Fed’s epic efforts. Get your US Dollar market update from @DavidCottleFX here:https://t.co/D2p2Vl2ORK https://t.co/56Iq8CmJ7Z
  • Indices Update: As of 10:00, these are your best and worst performers based on the London trading schedule: Germany 30: 1.33% France 40: 1.21% Wall Street: 0.29% US 500: 0.26% View the performance of all markets via https://www.dailyfx.com/forex-rates#indices https://t.co/zusHPHZgFm
  • Ripple IG Client Sentiment: Our data shows traders are now at their least net-long Ripple since Mar 29 when Ripple traded near 0.16. A contrarian view of crowd sentiment points to Ripple strength. https://www.dailyfx.com/sentiment https://t.co/TnhXuofL8C
  • #Bitcoin prices may see a pickup in volatility ahead of the 2020 halving as the #coronavirus pandemic threatens to disrupt cross-continental $BTC mining operations. Get your market update from @ZabelinDimitri here: https://t.co/BoH24MVf4P https://t.co/c7YqD7VXqc
  • IG Client Sentiment Update: Our data shows the vast majority of traders in Ripple are long at 94.72%, while traders in Wall Street are at opposite extremes with 78.06%. See the summary chart below and full details and charts on DailyFX: https://www.dailyfx.com/sentiment https://t.co/OukR4dIlJc
  • Commodities Update: As of 07:00, these are your best and worst performers based on the London trading schedule: Oil - US Crude: 1.18% Silver: 0.00% Gold: 0.00% View the performance of all markets via https://www.dailyfx.com/forex-rates#commodities https://t.co/xivz7ptPMn
  • Hey, traders 👋 do you want live AMAS with our analysts, market updates and tools to improve your trading strategy? Join us now on Instagram! 👉 https://t.co/pHGzVMqsC4 https://t.co/EBCYaTLWGi
  • Forex Update: As of 07:00, these are your best and worst performers based on the London trading schedule: 🇦🇺AUD: 0.25% 🇳🇿NZD: 0.18% 🇪🇺EUR: 0.18% 🇨🇭CHF: 0.12% 🇯🇵JPY: 0.11% 🇬🇧GBP: 0.05% View the performance of all markets via https://www.dailyfx.com/forex-rates#currencies https://t.co/aM45N7u2eL
The Risk in Trading and Investing on Resolutions to Trade Wars, Brexit and NAFTA

The Risk in Trading and Investing on Resolutions to Trade Wars, Brexit and NAFTA

2018-09-22 02:00:00
John Kicklighter, Chief Strategist
Share:

Talking Points:

  • Probability and potential are vital components to analyzing investment opportunities
  • While low probability events can pay out handsomely, they happen very infrequently - yet not all options follow such a skew
  • The US-China trade war, Brexit negotiations and US-Canada NAFTA talks have seen probabilities blur but the 'risk' skew remains

Do you want to sort what top fundamental themes can influence the markets over the week ahead or learn how to combine fundamentals with your technical analysis? Sign up for the weekly fundamental trading webinar Monday or other regular trading events on theDailyFX Webinar Calendar.

Probability Versus Potential: The Rare Windfall vs The Steady Gain

Just as ubiquitous as the concept of risk-reward is to our trades, there is also a practical assessment of probability versus potential. We can decide to ignore both, but truly thorough analysis and trade strategy should fully engage both vital assessments. For those novices that come to the market with more aspiration than plan, there is a tendency to seek out the 'homeruns'. These would be the rare events where a massive flux of volatility will render a favorable move for a quick and massive profit. Books and articles are littered with examples of such trades, but that belies their infrequency and the work that goes into identifying such opportunities. A surface appreciation of the markets informs traders that the most extreme market movements are those that are largely unexpected or improbable. That usually aligns to surprises on key event risk or attempting to pick tops/bottoms on remarkable trends. Those are understandably rare developments, yet traders seek them out far more often. Rather than seeking out the exceptional high return but troublingly infrequent events, plans to trade over a longer period of time (most of us are looking for a successful career of this) benefit pursuing higher probability with enough return to make the effort worthwhile. This should seem relatively straightforward. However, as with anything important that involves money, there is nuance.

When Expectations and Risk-Reward Start to Skew

While there is generally an inverse correlation between potential and probability (the greater the likelihood, the lower the payout), the relationship is not fixed to such extremes. Given enough time to process an ominous and seemingly disastrous threat to the financial system, the market may slowly deflate the ultimate impact the outcome can have as there was thorough time to evaluate its full fallout. Alternatively, an exceptionally long run from a particular market may carry with it the general probability of the physics of speculative appetite (a trend in motion is likely to stay in motion), but eventually the tempo can render the potential for follow through and threat of correction simply too extreme to pursue. There are a few examples from recent history that can exhibit these distortions. The S&P 500's current path for example skews the balance. There certainly is a greater probability of follow through on the bullish course, but the advance would likely be a crawl. Further, a correction would very likely be violent - if it is remarkable enough to turn this market... Brexit is a fundamental example of this same concept. In 2014, the Scottish Referendum rendered a 'status quo' outcome as did the UK's 2015 General Election. Come June 23, 2016, the people voted to leave the European Union unexpectedly and caught the market fully off guard. The result was a dramatic tumble from the Sterling.

Weekly Chart of GBPUSD

Don't Presume Trade Wars, Brexit and NAFTA Happy Endings

Consider the examples above and believe that such situations are not as rare as most may think. There are those events where the situation may seem a straightforward outcome for the market participants or policymakers involved in determining the benefits and detriments to outcomes. An important example is the US-China trade war. Currently, there is little reflection of the systemic threat that this situation represents for the global financial system. With the S&P 500 at record highs and capital starting to flow back into risky Chinese assets via the Hong Kong Dollar and Shanghai Composite, clearly complacency is in full force. Yet, any certainty that the two largest economies would come to an agreement for mutual preservation should be banished by now. The volleys of economic and financial interference have come more quickly and in larger scale. The trade negotiations between the US and Canada is another such example. Though it may make sense that these two countries (each other’s' largest trade partners) would come to some compromise to protect their collective strength, the Trump administration has proven aggressive in its tactics and expected deadlines have consistently come and gone. And, then there is the Brexit again. The Sterling has steadily risen these past weeks as confidence of a compromise grew despite the troubling language between UK and EU counterparts. I was heartily crushed this past week though when an official summit ended with clear disagreement and angry words. We discuss the flexibility of probability and potential in today's Quick Take Video.

S&P 500 and Shanghai Composite Weekly Chart

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.