Wars and Wall Street: How To Trade Through Black Swan Events

There’s not a single career (that I can think of) where an individual faces as much uncertainty on a regular basis than that of a stock market trader. In addition to the daily fluctuations of price action that demands specific position management, traders are continually faced with the challenge of adapting to unforeseen news events. These unpredictable events, commonly referred to as Black Swans, have the potential to redefine market dynamics. Unfortunately, the world has just experienced such an event over the weekend with the Hamas assault on Israel, thrusting the nations into war. How is a trader to navigate the markets with such heightened uncertainty?

The Art Of Trusting The Visible Data

Emotions running high are only natural in the face of a global news event like this. Perhaps even more natural are a trader’s worries and assumptions about how such a crisis might affect the markets and his or her own positions. However, a trader can get into trouble if they allow these assumptions to prompt them into making premature decisions. Tragic news of war breaking out in the middle east doesn’t mean you should run to your broker, close all your longs, and short the markets with all the strength of your available trading margin. Indeed, traders who shorted into this week in anticipation of a massive market drop are likely very disappointed to see the markets marching higher this week as of Tuesday morning (SPY is up +1.46% on the week, QQQ is up +1.38% on the week, and IWM is up +2.23% on the week at the time of this post.) 

So then– since no one is certain of how other market participants will react to the news, there’s only one logical way to react: trade what you SEE, not what you THINK. Regardless of the cacophony of global opinions, a technical analysis trader's best tool is real-time price action. No, I’m not suggesting you completely dismiss the significance of news and its potential to shift market dynamics. The news IS important, but it should be used more so as an awareness indicator rather than a hard and fast decision-maker. Traders should never rush to initiate or liquidate a position based solely on speculations about how other market players might respond to a specific news event. After all, a trader adhering to a solid trading strategy should already have proactive risk measures in place to protect them from extreme market volatility. Instead, traders should closely monitor how price is reacting to the news, and only if necessitated by their trading plan should they take appropriate actions such as widening stop losses or moderating position sizes.

The Steadfastness Of Rational Decision-making

In the face of earth-shaking events, the importance of calm, rational trading cannot be stressed enough. Making decisions anchored in the actual market trajectory protects you from undue stress and sets the stage for consistent outcomes. Incidents like the Hamas-Israel invasion, while undeniably tragic, should never serve as a basis for making assumptions about market responses. A trader must be cautious to not rely on their gut feelings, intuitions, or preconceived notions and should instead focus solely on what price is doing at the moment.

Rely On THIS For Consistent Trading...

In the tempestuous realm of trading, a trader's only reliable anchor is a proven, time-tested, rules-based trading plan. Perhaps this sounds like a 'no duh' statement, but it warrants emphasis. Think about it– what do quant funds (algorithmically traded hedge funds) do? At their core, their algorithms adhere to a strict set of predetermined rules to achieve profitability over time. A trading plan aims to do the exact same. While no strategy offers absolute predictability or guaranteed returns, a well-crafted, rules-driven trading plan that's crafted with the guidance of an experienced trading mentor tips the balance in your favor. Removing the guesswork from trading, this plan enables you to navigate confidently through the usual market volatility as well as the rare Black Swan events. The law of averages will eventually work in your favor if you follow such a trading plan with unwavering commitment. The only question is...are you up for it?

After having personally mentored thousands of traders, I cannot emphasize enough the need for traders to have a solid trading education. If you’re considering taking up trading as a side income or full-time income, consider taking our free 101 trading course. It’s a simple yet highly informative six video series that will give you a solid trading foundation and will serve as your starting point on the path to profitable trading. Take my word for it when I tell you that the markets are no place for the uneducated...they will chew you up and spit you out (financially AND emotionally) if you don't know what you're doing. That said, they can be pleasantly rewarding when approached with the right strategy.

I highly recommend jumping in to the 101 courses (they're free anyway!) today. Go here:

https://www.freeonlinetradingeducation.com/sample-101-video.html

-Des Woodruff (aka d-seven)
​Grok Trade