Classic options are products that are primarily designed for short-term trading. For this reason, brokers often offer terms of 60 to 120 minutes. This trade can only be carried out with the market technology for private traders, since private traders are confronted with high frequency traders in terms of speed.
How do HFT traders trade?
However, they trade less according to the market technology, but use the expectations of market participants in relation to certain events. These can be both monetary and economic events.
- German GDP is better than expected.
- Algorithms run in (millis) seconds Trades in the DAX futures contract even before other traders can react to them.
- Seconds later, HFT traders close their positions again. They use the effect of stimulating demand, so to speak, but have the advantage of being able to react much faster.
In this case, private traders have no chance of getting a better price. Short-term trading would therefore be recommended to every private trader if there are no upcoming events that are traded by HFT traders. The market technology would be a better choice at this point.
When is event trading useful?
When event trading is less useful for private traders has already been clarified. But are there times when event trading can also be used successfully by private traders? Yes, there are!
However, this is not about a specific time, but rather about the terms of binary options. As mentioned above, the chances against HFT traders in the short-term area are extremely poor. However,
events are different, which also means that their effects on the markets can be different and the influence has different lengths, It is therefore important for the trader who wants to trade events to find out first which events have an effect on the markets and for how long.
In addition, the influence must be differentiated depending on the asset class. Since relevant events with a longer impact are often difficult to find, many event traders trade individual shares because they have a larger selection. In the area of liquid markets such as currencies, monetary policy interventions are very important to event traders.
Event traders should have a special gift towards market technicians: They must be able to correctly assess the expectations of market participants. Why is that so important? This is simply because expectations have an impact on prices before the event.
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Example of successful event trading
As already mentioned, event trading is about that to differentiate between the expectations and the relevance of the events. Often two events counteract or reinforce each other. That should also be considered. A current example is the non-farm payrolls published in the US labor market report last week. This is how the event is interpreted:
- The data turned out better than expected = US Dollar Strengthens
- However, the US stock markets plummeted
Generally, positive labor market data should also have a positive effect on the stock markets. At first, however, the US indices plummeted and the US dollar rose.
This divergence can be explained by the expectations of market participants for another event, namely the early rate hike by the US central bank FED. For investors, the question has been around for some time: When will the Fed raise interest rates? Already in June, only in September or even later this year?
In this case, the strong labor market data led to the stock markets collapsing, because expectations of rising interest rates favor either bond markets or foreign stocks. The US dollar also benefits from this. The negative correlation between the US stock markets and the US dollar was brought about by two events.
Event trading is not always superior to market technology. This is especially true for short-term trading. Critics of fundamental analysis and event trading claim that the market technology already reflects all information, so the market technology is sufficient for successful trading. However, this is not always correct, because events do not affect the market at the same time, but in the form of expectations.
Those who are able to interpret these expectations correctly have a particular advantage. He can react much earlier than the pure market technician. However, interpreting these expectations requires years of trading experience. A combination of both methods might also be more advantageous.