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US Elections: Stock Market Performance

EBX Markets — Mon, 12 Oct 2022 14:54:57 +0000

With a little more than three weeks to go, the 2022 US elections is just around the corner.

November 3 sees Democratic nominee Joe Biden, a former vice president from 2009 to 2017 during the Barack Obama administration, go head-to-head with incumbent Republican president Donald Trump.

As of writing, the national polls, sourced from fivethirtyeight.com, reveal Biden leads by eight points, and has remained on top since the beginning of the year. Impressively, Biden’s lead widened heading into June and has fluctuated an average of 8-9 points since. In fact, Biden leads Trump in the bulk of opinion polls.

But can we trust the polls this time?

Trump won the 2016 election despite the majority of polls suggesting Hilary Clinton would come out on top. For the fifth time in American history, the 2016 election produced a mismatch between the popular vote and the electoral college outcome.

In some respects, though, 2016 polls were accurate. FiveThirtyEight, a website owned by ABC News that focuses on opinion poll analysis, projected Hillary Clinton would win the popular vote by three percentage points – Clinton won by about two points. The problem was inaccurate polling at state level, in particular Michigan, Pennsylvania, and Wisconsin. Clinton lost all three of these states (critical in the electoral college), despite being a heavy favourite. According to New York Times polling expert Nate Cohn, there were two reasons pollsters got it wrong. Firstly, late voters sided with Trump in large margins. Secondly, Trump got some people to vote who pollsters weren’t expecting to make the effort.

Historical Performance – Presidential Election Cycle

Developed by Stock Trader’s Almanac founder Yale Hirsch, the ‘Presidential Election Cycle Theory’ states the first couple of years of any presidential term often generates uninspiring returns. The subsequent two years, however, tends to produce stronger performance. The rationale behind this theory is the incumbent president’s agenda, during the first two years, takes time to have an effect on the economy.

As you will see, though, the Presidential Election Cycle theory is not fool proof and previous results don’t always guarantee future performance.

An example of this (see figure A) can be seen in the first two years of Barack Obama’s first term. The Dow Jones Industrial Average (consists of 30 large publicly-traded US companies) outperformed in the first two years, more so than his subsequent third and fourth year.

(FIGURE A: Dow Jones Industrial Average chart sourced from https://stockcharts.com/)

A more recent example (figure B) can be found during the first year of Donald Trump’s presidency, in which the Dow Jones Industrial Average clocked record highs.

(FIGURE B: Dow Jones Industrial Average chart sourced from https://stockcharts.com/)

Previous years seem to be more respectful of the Presidential Election Cycle theory.

Take 1936-1940, for example, Roosevelt’s 2nd term in office (figure C). The Dow Jones Industrial Average sharply declined during his first year and through the early stages of his second year, before chalking up a recovery. The subsequent third and fourth years produced zero gains, however.

(FIGURE C: Dow Jones Industrial Average chart sourced from https://stockcharts.com/)

Roosevelt’s third term (figure D), 1940-1944, showed a considerable decline in the first year and bottomed during the second year. Years three and four continued to outperform.

(FIGURE D: Dow Jones Industrial Average chart sourced from https://stockcharts.com/)

Election Day

From 1984 to the present day, research reveals that approximately 80% of the time the Dow Jones Industrial Average observes gains on the day of elections. Interestingly, though, more than 75% of the time the stock market retreats the following day.

Barrack Obama’s win on November 8, 2008 sent the Dow higher by more than 3%, and his second re-election on November 6, 2012 also saw the Dow rally 1%. Donald Trump’s win over Hilary Clinton on November 8, 2016, despite considered to be an upset (and a result that should’ve sent stocks lower), also witnessed the Dow rally 0.4% (figure E).

(FIGURE E: Dow Jones Industrial Average chart provided by TradingView)

Stock Market Heading into Elections

Based on the three major US equity benchmarks (see figure F – index CFDs), the S&P 500 (measures the performance of 500 large companies listed on stock exchanges in the US), the Dow Jones Industrial Average and the Nasdaq Composite (a market index measuring over 3000 of the equities listed on the Nasdaq stock exchange), US stocks trade strongly as we near election time. Both the S&P 500 and Nasdaq clocked fresh all-time peaks at the beginning of September, with the Dow not far behind fresh all-time highs (see figure F).

Interestingly, some analysts believe the stock market’s performance in the three-month period prior to the elections can forecast the outcome. Positive returns in the stock market in the run-up to election day signals an increased likelihood the incumbent party could win. Conversely, underperformance in the stock market during the same period tends to estimate an opposition party win.

As can be seen from figure F, all three equity benchmarks have mostly advanced as we head into the 2022 elections.

(FIGURE F: US Stock charts provided by TradingView)

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2022 US Elections: An Introduction

EBX Markets — Thu, 01 Oct 2022 15:34:41 +0000

Set by Congress in 1845[1], election day is always held on the first Tuesday after the first Monday in November. This year it falls on November 3.

US citizens aged 18 years and over are eligible to vote in the US elections. According to the Census Bureau[2], 245.5 million Americans aged 18 and over were eligible to vote in the November 2016 elections. However, only 157.6 million registered.

Understandably, Interest peaks as election time draws near, yet the route to the White House is often misunderstood.

Hopefully, this introductory piece will help clear up some of the confusion.

The US election process can be viewed in five phases:

Primaries and Caucuses
National Conventions
Election Campaigns
General Election
Electoral College

Primaries and Caucuses

Every four years, US states hold primary elections or caucuses to select candidates to run for public office.

State and local governments determine which dates primary elections or caucuses are held, though this year there were some changes due to COVID-19.

Primaries are run by state governments. An open primary permits registered voters to select whichever candidate they want, regardless of party affiliation. In a closed primary, however, voters must be registered with a political party and can only select a candidate within their selected party.
Caucuses are elections run by political parties. In a caucus, party members select the best candidate through a series of discussions and votes.

Democrats and Republicans nominate their candidate at the party’s national conventions.

National Conventions

Often enormous affairs, a national convention is held by each party to select a first presidential nominee. It marks the end of the primary election and beginning of the general election.

Although the nominee is frequently known ahead of time, at each convention the presidential candidate chooses a running mate, a vice presidential candidate. Here, parties also determine a platform, a statement of policies they’ll implement should they win the election.

Election Campaign

Following the national conventions, presidential candidates campaign throughout the country to win the support of the general population.

The idea behind an election campaign is to provide a stage for parties to present their message (often containing a number of key issues surrounding policy) and ideas they want to share with voters. A party’s message is frequently repeated in order to drill home their position and create a lasting impression.

In today’s connected world, a candidate’s every word, action and expression are recorded and shared.

Political campaigns are expensive, with the majority of funding spent on television and radio commercials. Funding for election campaigns is derived from a number of resources, including tax payers.

General Election

The general election, as highlighted above, is held on the first Tuesday after the first Monday of November, every 4 years.

Voters in each state (indirectly) place their vote for one president and vice president. This is an aspect that often confuses voters.

The choice of each voter is reflected in what’s known as the popular vote – the president is not elected via popular vote.

Voters actually vote for a group of people called electors. The president (and vice president) is then selected by the Electoral College.

Electoral College

The electoral college, consisting of 538 electors who cast votes to decide the president and vice-president of the US, is a unique (and often confusing) method for electing a president.

For a candidate to become president at least 270 of the 538 possible votes must be secured.

Names of electors are not on the ballot in most states. Instead, when a voter casts a vote for a presidential candidate, they’re voting for the electors already selected by the party of that candidate. So, for example, if the majority of voters in a state vote for the Republican candidate, the Republican slate of electors is elected.

While the electoral college results usually support the popular vote, some notable outliers exist. The 2016 election is a recent example, in which Donald Trump won the electoral vote though was destroyed in the popular vote, but still became president of the US. Hillary Clinton, the democratic nominee, received nearly three million more popular votes.

Polls

As we cross over into October, the national polls, according to fivethirtyeight, reveal Joe Biden, the democratic nominee, leads by a little more than seven points over Republican president Donald Trump (figure A).

Incumbent President Donald Trump’s approval rating (an updating calculation of the president’s approval rating, accounting for each poll’s quality, recency, sample size and partisan lean – fivethirtyeight) is also below 50 percent (figure B).

Source: https://projects.fivethirtyeight.com/polls/president-general/national/ (Figure A)

Source: https://projects.fivethirtyeight.com/trump-approval-ratings/?cid=rrpromo (Figure B)

[1] https://www.loc.gov/law/help/statutes-at-large/28th-congress/session-2/c28s2ch1.pdf

[2] https://www.census.gov/data/tables/time-series/demo/voting-and-registration/p20-580.html

Forex Leverage and Margin Defined

EBX Markets — Fri, 18 Sep 2022 13:34:26 +0000

Leverage is vitally important, yet it remains a misunderstood concept for many traders.

The leverage ratio essentially governs the margin required in an account to trade.

1:100 leverage means for every 100 USD traded, 1 USD margin is required (or 1%). 1:200 leverage, therefore, means for every 200 USD traded, 1 USD margin is required (or 0.5%). Here, a trader can effectively control 200 x more money than what is in the account.

Lots

A standard lot is 100,000 currency units.
A mini lot is 10,000 currency units.
A micro lot is 1,000 currency units.

As an example, one standard lot of EUR/USD is 100,000 euros, while one mini lot of EUR/USD represents 10,000 euros.

Currency pairs consist of two currencies. The euro, in the case of EUR/USD, represents the base currency and the US dollar denotes the quote or counter currency. It is the base currency that’s bought/sold, always representing 1 unit. The quote currency informs traders what the value of the base currency is worth.

If GBP/USD trades at $1.3000, 1 GBP is valued at 1.30 USD. 10 GBP, therefore, would be worth 13.00 USD.

Is Leverage a Loan?

Leverage in the derivatives market, including spot FX, is not a loan from your broker as derivatives are based on agreements. Unlike futures and options contracts, margin FX products traded through MetaTrader cannot be settled by physical or deliverable settlement of currencies – they’re rolled or swapped indefinitely and settled in cash.

In spot Forex, currencies are traded in pairs. If you enter long GBP/USD at $1.2000, you agree to buy GBP and sell USD. Remember, spot FX trades in agreements.

With the above in mind, imagine GBP/USD trades at $1.2900 and the trader enters long 100,000 units, 100,000 GBP are to be received and 129,000 USD are to be delivered within the agreement. Say the pair trades to $1.3000 and the same trader decides to liquidate the position (the agreement), 100,000 GBP is now worth 130,000 USD, a 1,000 USD profit. No currency ever changes hands and no loan is required from the broker.

Margin

Margin is a percentage of your equity put aside by your broker to execute trades. This is to cover the possibility of loss in your account. Margin is not a cost or a fee. This value, used margin, will not fluctuate during a trade. As long as the equity level remains above margin, the account will not hit the broker’s stop-out level.

Free margin is the money in a trading account available for executing additional positions. It’s also the value current position(s) can move against you before the account receives a margin call.

As far as your broker is concerned, your margin requirement will be calculated in your account currency.

If your account is denominated in USD and the base currency of the pair traded is also in USD, the margin requirement can be calculated by dividing your leverage ratio. For instance, an account set at 1:100 equates to a 1.00% margin requirement (1/100). So, trading one standard lot (100,000 units) equals 1,000 USD margin. Trading one mini lot (10,000 units) equals 100 USD margin.
If your account currency is different to the pair traded, a different calculation is required. For an account denominated in AUD, though trading EUR/USD, multiply the position value (100,000 units for a standard lot) by the current EUR/AUD price and then multiply this value by the margin percentage (1% in this case). To trade EUR/USD with an account denominated in AUD at current prices you need 1,631.6 AUD margin (100,000 * 1.6316 [EUR/AUD] * 0.01).
If your account currency is the same as the quote currency of the pair traded, you must multiply the position value (100,000 units if one standard lot) by the current price of the pair traded and multiply this value by the margin percentage, which in this case is 1% (1:100 leverage). Trading EUR/AUD with an account denominated in AUD, with one standard lot, requires 1,630.9 AUD margin to execute a trade (100,000 * 1,6309[EUR/AUD] *0.01).

The Stop-Out Level

Forex brokers seldom call clients to initiate a margin call. However, it is an option in cTrader, a trading platform provided by many popular brokers in the retail foreign exchange industry.

The term you need to focus on is the stop-out level. IC Market’s stop-out level on MT4/MT5 and cTrader is 50%. This means if your equity dips beneath 50% of your used margin level, the platform will automatically liquidate the most unprofitable trades. So, if used margin is 1,000 USD and your account trades to 499.99 USD (49.9%), trades will begin to close. At this point you also have the option of depositing additional funds to increase your margin level.

Forex Trading: What is the Spot Market?

EBX Markets — Fri, 14 Aug 2022 16:20:14 +0000

Financial markets are a mystery to many, thought to be overloaded with convoluted terminology.

One market in particular that often causes confusion is the spot market.

Commonly referred to as the cash market or physical market, the spot market is a place securities are exchanged for cash and delivered on the spot. The price quoted, the spot price, is the current market value an instrument can be traded – the price an instrument can be bought or sold immediately.

The foreign exchange market is recognised as the largest spot market in the world.

Previously, the foreign exchange market, or Forex market, was restricted to large financial institutions. Thanks to the wizardry of modern technology, however, retail FX trading has grown in popularity.

Nowadays, it’s straightforward for retail traders to open a margin account with a Forex broker. EBX Markets allows clients to open an account with as little as 200 USD or currency equivalent, with the application process taking only a few minutes. IC Market’s mission is to provide traders with the lowest spreads and fastest executions possible across more than 285 products including Forex, precious metals, stocks, futures and other commodities.

Exchange Vs. OTC

Spot market transactions can take place on an exchange or over-the-counter (OTC).

Exchanges are organised physical (and electronic) locations, highly regulated to offer transparency and provide efficient and orderly trading conditions by centralising buying/selling.
Conducted electronically, an OTC market has market participants trade directly with one another. No exchange or central clearing house exists. Dealers act as market makers, quoting tradable Bid/Ask prices. OTC markets are considered less transparent than exchanges. According to the 2019 Triennial Survey of turnover in OTC FX markets, trading in FX markets reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier. At $2.0 trillion per day, the volume of spot trades in April 2019 was 20% greater than in April 2016[1].

Settlement

A spot transaction refers to an exchange of currencies at the current market rate.

Although the FX spot market means ‘on the spot’ or ‘immediate’, funds are actually exchanged on the settlement date, typically two business days following the agreement, expressed as T+2. Notable exceptions are currency pairs such as USD/CAD, which settle one business day after the trade, T+1.

In order to allow for a seamless trading experience, as most market participants trade for speculation, Forex brokers roll positions forward (at the rollover date) on your behalf and charge a swap. MetaTrader 4 (MT4) FX swaps are calculated on the overnight lending rates in the interbank market, provided to Forex brokers from liquidity providers.

If brokers failed to roll trades, you’d effectively have to buy/sell your existing position every two days. The swap tab highlighted in figure A is where you’ll find your swap credit/debit value for any active trades open longer than one day (past 5pm EST) on your MT4 trading platform.

(FIGURE A)

Apart from Wednesday, your account will, assuming a position is left open after the NY close, either earn credit or be charged a debit (this depends on the interest rates of the currencies traded). Usually, credit is earned if the long currency’s interest rate is higher than the short currency. Similarly, the account may be debited if the interest rate of the short currency is higher than the long currency.

FX brokers apply triple swap on Wednesday because that’s how it’s applied by the banks providing liquidity to the FX market. Remember, FX spot trades usually have a two-day settlement. Triple interest is applied to FX trades at 5pm Wednesday (NY close) as this marks the beginning of a new 24-hour trading day (Thursday) in the global FX market. As the position takes two days to settle, the trade would settle on Saturday when banking institutions are closed, hence the triple interest/charge into Wednesday’s close to cover this.

[1] https://www.bis.org/statistics/rpfx19_fx.pdf

Forex Trading: An Introduction to Trading Strategies and Trading Styles

EBX Markets — Thu, 16 Jul 2022 14:54:46 +0000

Without rules of engagement, you essentially operate on emotion instead of a well-ordered approach. This is what a trading strategy provides.

Countless Forex trading strategies are available, therefore choosing a suitable approach can be a challenge.

What’s a Trading Strategy?

You may have heard maintaining discipline is key to becoming a successful trader. Equally as important, though, is having a well-reasoned and back-tested trading strategy.

A trading strategy is an organisation of rules, covering all aspects of entering and exiting the market. However, this is all but one section of an overall trading plan. A complete plan includes things such as a money-management strategy, a detailed list of currency pairs to focus on, times to trade and risk-management measures.

Trading strategies are based on either technical analysis or fundamental analysis, or a mixture of the two, usually verified through rigorous historical and forward testing. For the purpose of this article, the spotlight will be on the technical side of the market.

Trading Style

Personality and time constraints play a key role in determining which style a trader should explore.

Four main trading styles exist:

The scalper
The day trader
The swing trader
The position trader

The scalper seeks multiple brief, profitable, opportunities in a day.

If you’re more comfortable predicting the direction a currency pair is headed in the next 10 minutes than you are forecasting direction in the next 10 days, you are perhaps a scalper. Scalping often involves lengthy periods of screen time, difficult for those who have full-time jobs.

Scalpers look to capture, in short timeframes, the first stage of a move or pattern. Further adding to this, scalpers typically have a healthy account size in order to generate worthwhile profits in small moves. As such, the scalper style may not be a suitable approach for every type of trader.

The day trader is a watered-down version of a scalper. Positions are opened during the trading day and are usually liquidated before the market close. The main objective of a day trader is to take advantage of small price movements in highly-liquid markets. The more volatile the market, the more favourable the conditions generally are for a day trader.

Comparing the scalper, who can initiate 10 or more trades in a day, Forex day trading activity may only consist of one or two trades each day, using timeframes ranging from the 5-minute up to a 15-minute scale (a scalper will likely be focused on the 1/3-minute timeframes). Day trading requires healthy patience and generally long periods at the screen in order not to miss favourable trading patterns or potential breakouts. Again, not a style one should be looking at if you have full-time obligations.

Both the scalper and day trader tend to be driven by daily results.

The swing trader is considered a patient individual, content that trades may last for several hours, a few days or even a few weeks. Unlike scalping or day trading, this style suits those who have full-time jobs and those who dislike the idea of several hours behind the screen.

Most swing traders think long term, focusing on quarterly results. According to swing traders we’ve interviewed, swing trading alleviates the pressure to make money on a daily or weekly basis.

Swing traders also tend to enjoy the analytical side of trading on slower timeframes (H1 charts and higher), using a mix of high-probability patterns and indicators.

The position trader, on the other hand, thinks long term, similar to an investor. If you’re a position trader you may look at the screen once a day. Most, however, will open their platforms only a couple of times a week to check on current trades, or execute fresh positions.

Trades in this category tend to last long periods of time (months or even years in some cases if the conviction is strong). Short-term movement carries little weight in the eyes of a position trader.

Trend Following Trading Strategies

On most price charts, it is clear price action trends.

It is trending movement trend followers look to identify and exploit.

Numerous methods exist in this category, with some standing the test of time.

Moving averages are one of the more commonly used indicators in the trend-following community. In the right hands, these tools are powerful.

The two most popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The simple moving average is calculated by adding the closing prices of an instrument, and dividing this total by the number of time periods. This is the mean value. The exponential moving average, although similar to the simple moving average, houses a subtle difference: more weight is given to the latest data in the calculation. Accounting for this, exponential moving averages tend to react faster to price movement.

Moving averages provide a simple, yet effective, way of measuring trend. At its most basic, should the instrument trade beneath a selected moving average, this signals the primary uptrend may be weakening and an opportunity to join a downtrend could be on the cards. The same applies to a price shift above a moving average, only here we’d be looking to join a possible uptrend, as opposed to a downtrend.

Below are typical settings traders use to engage with the market:

10/15-SMAs are popular with scalpers and day traders to identify short-term trends.
50-SMAs are typically used to gauge mid-term trends. Think the swing trader here, H1 and H4 timeframes.
The 200-SMA is favoured among longer-term traders. Think position trader here.

Figure A demonstrates how traders track price movement using a simple moving average on the H4 timeframe (EUR/USD), resulting in possible opportunities to trend trade. In this instance, we used the 50-SMA to gauge mid-term direction. As you can see, things quickly become tricky when the market enters a consolidation phase (right-hand side of the chart), therefore best to try and avoid these types of markets.

Figure A

Alongside trend identification, moving averages are also used as a means of entry confirmation. Having two moving averages crossover can provide reliable buy and sell signals.

Long-term traders tend to opt for a 200/50 period setting, while shorter/medium-term traders target lower settings in the range of 50/20. When the shorter-term moving average crosses above/below its longer-term counterpart; a signal to engage is presented.

Figure B, on the EUR/USD M15 timeframe, shows a (50) simple moving average (red) along with a (20) simple moving average (blue). The green arrows denote potential entry signals where the (20) moving average crosses its longer-term equivalent. However, like all things technical in the trading domain, nothing is guaranteed to work 100% of the time. Note the fake signal to sell short, circled in red. It can get particularly frustrating when multiple back-to-back false signals are generated, normally seen in a ranging environment.

Another aspect to bear in mind is the spread between moving averages: the further apart they are, the stronger the trend is likely to be.

Figure B

Price action trend following techniques have also become popular over the years. As an uptrend progresses, resistance levels are consumed and often become active support once retested (the same for a downtrend, only support levels are consumed and used as resistances). Just to be clear, identifying key support and resistance levels takes time to master.

As in figure C, price respects the support-turned resistance level but failed to continue lower. Instead, the unit responded from nearby demand. This will happen at times. You have to learn to roll with it and trust your trade-management approach.

Figure C

Not a Standalone Strategy – Confluence

Trading based solely on a moving average crossover is unlikely to work in the long term. Using them with additional tools is recommended, referred to as trading confluence.

For example, imagine a scenario where you’ve managed to pin down a strong support level that boasts historical significance. Now imagine a firm break of this level taking shape that’s shortly after followed up with a retest. This, combined with price trading below your selected moving average or together with a moving average crossover, could be a strategy by and of itself. Two components are effectively working together to validate shorting opportunities – remember keeping it simple is key. Don’t make the mistake of overloading charts with indicators, this is likely to lead to analysis paralysis.

As for stop-loss placement, either beyond the support/resistance level, or beyond the moving average, are popular options. Another use a moving average offers is determining where to take profit when trailing a position. As the trade progresses and the moving average alters course, you can adjust your stop position behind the moving average as price moves in favour (a trailing stop).