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Hey, everybody. Welcome back. I’m Rob Booker, and we’re going to talk about North Korea and trading. In 17 years of trading primarily the currency markets, I found that economic events or really big scary economic events can be some of the biggest drivers of price. Now I’m not here to talk about how we’re going to benefit from other people’s misfortune, but what I do want to talk about today is how we can make the most of a situation that seems to be going bad, and how we can protect ourselves in the trading world from making big mistakes at a time when those could be really costly.
Here we go. Now, in the last 17 years there have been a few things in the world of currency trading. One of those things is manage money as a commodities trading advisor. Now during the time that I’ve been a commodities trading advisor there’s been conflict in the Middle East, in Iraq and Kuwait, and there’s been war in Afghanistan, there’s been the 9/11 attacks, there has been the financial crisis, the Swiss National Bank crisis, and a number of other sort of major political or economic shocks to the system.
The North Korea situation right now fits really well into a pattern that I’ve developed for looking at these kinds of situations, and then protecting our account, or if you’re so inclined maybe making a trade based on that information. The number one most important question to ask is this. The question you ask when you start off thinking about major political or economic events and trading is what is the major influence.
Now this is an important question because a lot of the time someone will jump on Facebook, or some brand new trader will start talking about economics and politics or whatever, and they’ll talk about fundamentals is the only and most important thing in the world of trading. Well, it’s one of the components that’s really important, but there are times in our lives and in our trading where there is no major influence or there is no major story regarding politics or fundamentals or economics.
In order to know that something is a major influence, in order to even begin thinking about trading and economics or politics, you have to look at the front page of what is known as mainstream media. In order to do any of what we’re talking about here, you need to look at the front pages of mainstream media. If this story that we’re talking about shows up on the front page of mainstream media, and I mean the front page of the paper, not the front page of the business section, or not the front page of the economist magazine, the front page of the New York Times, the Washington Post, the London Times, or any other major, Republica in Italy or wherever else. It needs to hit the front page of mainstream media.
You might not like mainstream media. That’s fine. I’m not here to get into a political argument with you, but it needs to hit the front page. Before you can start basing trading decisions off of this kind of stuff or planning to protect your account against certain things, you want to make sure you’re not dealing with a minor influence of events. You need to make sure that the first thing you look at is, “Is this showing up on the front page?”.
Well, the North Korea situation definitely fits this description and definitely qualifies. It is showing up on the front page of all papers around the world. The second question you ask is “Does this major influence inspire fear or hope?” Now, when we’re talking about longer term trends developing or bigger moves happening that sustain themselves … I’m not talking about an economic report release that leads to a move in the market that lasts for a few hours in a day. That’s really cool, that’s super interesting, that’s a subject for another conversation and another video. I’m talking about when a major influence leads to a sustained move in the markets that you could call a trend, and it’s one of those super fast moving trends. Does that major influence lead to fear or hope?
I’ll give you two examples. Number one: the North Korea situation leads to fear. Everything about this situation is fear based, fear of, God forbid, nuclear war or conflict or the cessation of economic activities between countries, distrust between countries, it’s all based on fear. Right? That’s pretty obvious. All the economic and political reporting that’s done about the situation is based on fear.
However, there’s also times when there are situations that are based on hope. I know this going to bother some of you, and I know it’s going to make some of you upset, but when Donald Trump was elected, and the dollar rallied, and the stock market in the United States went up, there was this hope. I’m not saying it was justified. I don’t want to get into any political arguments. I’m saying that there was hope from especially the Wall Street class. There was hope that the markets would … When he was elected there was hope that his policies would spur economic expansion.
Now, listen, whether or not that really takes place or not is not the subject of this conversation. In fact, in order to make money from situations like this you have to separate yourself from your politics and your anger about some windbag, blowhard politician that doesn’t really care about you anyway, and you have to think about what’s important to you and your own trading account. Anyway, you ask yourself if something is based on fear or hope.
In the North Korea situation, since everything is surrounded by fear, you can then choose a financial instrument and take a trade or actually protect your account by watching out for moves in the market. For example, when the market is inspired by or directed by fear … When the market is motivated by a major influence that causes fear, you want to look at things like the Japanese Yen, the Swiss Frank, you want to look at the stock markets of the world, and you want to look at safe haven currencies to go up and stock markets to go down. Fear leads to risk off, or in other words stock markets down, risk assets down, and safe haven currencies up.
Now, the reason that the Japanese Yen or the Swiss Frank are safe haven currencies is a subject for another time. However, it’s important to mention the Japanese Yen, because North Korea, once again god forbid, seems to be threatening Japan as an ally to the United States, some people wonder, “Why would the Japanese strength, strengthen …” Strength. Strengthen. … “On news about North Korea?” The answer is because there are a lot of financial related loans denominated in Japanese Yen. When the shiz goes down and there is fear, and money is flowing out of these assets, it goes back to pay loans that are denominated in Japanese Yen. In order to pay back a loan in Yen, you have to but Yen. You see the Yen strengthen and lots of currencies around the world weaken against the Yen.
The Swiss Frank is a safe haven currency for not exactly the same reasons, and it’s a subject for another time. The stock markets of the world fall on fear when investors say, “All right, I’m going to pull all my money out of everything and I’m just going to protect it. I’m going to put it in cash or cash related type assets so that I can protect my money in this time of fear.” Until some kind of hopeful related news ends up on the front age, this cycle continues.
I hope that’s a good primer on how to use a major political or economic event in your trading. I hope you’re doing well. I would love to hear from you in the comments of this video. I’d love for you to subscribe to this video. If you’re watching on YouTube you can click the button that shows up right here on the side, or if you’re watching on my blog you can jump over to YouTube and subscribe in general through the link below. I’m Rob Booker and I will see you next time.