Developing a strategy that generates good performance and at low risk, is a process that takes a lot of time and many efforts. A significant part of the development process is based on the past behavior of the stock. In general, the price of the stock and its behavior include all the information known at that time, such as interest rates, financial results, economic and political climate, economic news etc.
In recent years the stocks prices and the market behavior were affected also by new factor: The Trump’s tweets.
Since Trump took office at the end of 2016, a period of euphoria has begun in the market, mainly following the significant tax cut he announced.
Almost nothing else could have affected the market more than this tax reduction. All the bad news was marginalized. The tax cuts boosted companies’ profits at once without the need to invest money in developing their businesses. It was really a great magic for the market.
In the years 2016- 2017, Trump’s tweets had only small influence on the market. Most of them had a slight effect and for a short time because all the time the good impact of the tax cut floated from above and the investors knew that the future would be better and therefore the effect of the bad tweets and other news was relatively low.
From the beginning of 2018 to the present, the situation has begun to change. The impact of tax cuts on the market has diminished to the point that today this is almost nonexistent and the market has become increasingly sensitive to every piece of news.
In the years prior to the Trump era, news from the White House would come to the market in a controlled and moderate manner and in much smaller quantities compared to the current period. When we look at the stock charts, we need to remember that their current behavior includes information that has never been before. I mean, of course, the Trump’s tweets.
The president’s power is enormous and in every tweet there is a potential to shake the market significantly. Indeed recently, after the dissipation of the impact of tax cuts, the market began to dance according to the flute of the president’s tweets.
The market is dance at the rhythm of the tweets and we are crying or laughing according on our market position …
If this phenomenon was only for a short of time, then it was possible to live with its effect but since 2018 the effect of the tweets has only increased. Since the tweets are likely to accompany us for many more years, whether by President Trump or by the other presidents to come, we must find a way to assimilate this new level of risk into trading systems.
In fact, if we want to develop a trading strategy when we rely solely on data before 2016, I have no doubt that it will be very difficult to see it succeed in the real trading. If we develop the strategy only on the basis of the Trump period then we will face the difficulty of data coming from a short period only and also here we will have many difficulties in the real trading.
It is an impossible task to anticipate the tweets and their impact on the market.
What is possible to do is to plan the system so that once there is sharp volatility in the market against our position, market exposure should be reduced rapidly. If the volatility is with the direction of the strategy, market exposure should be increased.
This is, of course, a simplistic description of the move that, in my opinion, every trading system needs to make if it wants to adapt itself to these powerful tweets effects. If the system does not adjust itself quickly! to the market, its chance to succeed is not great.
In practice, reduction and increase of the position is base on calculation made up of a large number of variables and filters. At the end of the process we determine what to do, when to do, and how many stocks to trade, if at all.
From my personal angle, I can say that in the middle of 2018 I put this idea into my best trading strategies. We can see this from the way trades took place in 2016 and in 2017. Each trade took a long time to be completed and they were made up of more than one or two transactions. In 2018-2019 most of the trades were shorter in time and much less complicated.
I can say today that the tweets effect have become part of my automated trading systems, especially in the part dealing with money and risk management. We have to remember that the investment world contains a reward and a risk and if we do not know how to deal with the risk effectively, we can not enjoy the from the reward. Simple as that.
We must play defense here in order to succeed in the long run and the tweets are a new factor we must to cover. As usual, I like to pay with time and not with money!
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