Traders Are Underestimating Event Risk Again and Why It Matters

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Financial markets are back to a complacent stage once again. Following a long time of stability, a lot of traders have become accustomed to treating macroeconomic news as something predictable – even unimportant. And yet, historical examples show quite the opposite – a period of relative stability is often followed by a highly aggressive price response.

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Expectation vs Reality: That’s Where the Risk Comes From

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The market environment is marked by tightly priced expectations. Outlooks from analysts are published; they get priced into the market right away, and their conditions become stable.

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Yet, the more expectations become correlated, the higher the probability of a disproportional reaction to their non-correlation.

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It looks like the classical “expectation trap”, when all participants expect the same outcome, and every kind of surprise becomes a catalyst.

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For instance, any deviation in an inflation report can:

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• cause a shift in expectations regarding rates;
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• lead to re-pricing of the whole market;
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• result in impulsive price changes within minutes.
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Why Traders Fail to Consider Event Risks

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Here are a few factors contributing to ignoring risks:

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First, the conditioned nature of market participants’ behavior. Recent reports might produce a limited impact on volatility, resulting in a false sense of stability.

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Second, a growing dependence on prognosis. Once expectations start to seem “correct,” traders start considering them as certainty.

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Third, increasing focus on technical analysis and setup building. Under low-volatility circumstances, many traders prefer to use technical setups and overlook fundamental triggers.

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And yet, fundamentals usually return precisely when it seems they do not matter anymore.

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The Illusion of Stability

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The issue is not in the absence of risk per se, but rather in the way investors perceive it.

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If the markets seem stable and the responses to economic news are minimal, this leads investors to expect the same results from future announcements. Hence, what is created is an illusion – the risk remains but accumulates during the calm period.

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As the full extent of investors’ expectations becomes realized, any deviations from these expectations, regardless of their magnitude, may have the potential to trigger large market moves.

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Volatility as a Strong Advantage

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Volatility is never considered by traders as a threat but rather as a resource. But it’s crucial to prepare for the speed with which this resource can manifest. As long as you are aware of the approaching news, you are still at risk because of inadequate execution. Your decisions may be implemented with a delay, a lot of slippage may occur, and the system cannot cope with the load.

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And that is why more and more professional traders pay particular attention not just to their trading approach but also to its implementation tool.

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Reliable Platform as a Part of Strategy

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There are several criteria for successful operation when there is a high risk of events. These include:

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• order execution speed and reliability;
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• stable operation of the platform under peak volatility conditions;
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• fair trading conditions;
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• the ability to trade effectively through sharp price changes.
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Such a trading environment can give you a distinct competitive advantage.

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Trading Infrastructure for High Impact Conditions

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It is known how crucial it is to be able to operate effectively when there are significant macro events ahead. This is why JustMarkets is built specifically to help you overcome them.n

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With an optimized speed and reliability trading infrastructure, our platform is designed to help you reach your full investment potential, even as market conditions shift rapidly.

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This way, you don’t have to wait for an opportunity or miss any price movement – you simply have enough capacity to move quickly.

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It’s Time to Reassess Worries

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Underestimating the risks associated with event-based volatility is never unusual. Yet, every trading cycle is ending in a similar way – with a sharp surge in volatility catching a majority of participants unaware.

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Align your trading positions and make sure your trading instruments correspond to the current trading environment.

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Because a slight deviation in economic expectation can lead to aggressive changes in prices, just timely processing will help you navigate this situation.

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Risk Warning: Trading Forex and CFDs involves significant risk and can result in the loss of your invested capital. This article is for informational purposes only and does not constitute investment advice.

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