How to trade US midterm elections – a handy guide from XTB

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Next week (6th November) sees US voters head to the polls is what is expected to be the most highly-anticipated midterm elections for US financial markets in recent memory. The consequences of the vote could be considerable given the fact they come amidst one of the strongest bull markets in recent times and as asset prices start to appear ‘overstretched’.

So what should you expect and how can you trade the expected market volatility? XTB, the award-winning FX and CFD broker, takes a look.

What are the midterms and how to trade US midterm elections?

Midterm elections in the US are held every four years close to the middle point of the US President’s term. At stake are the seats of members of Congress, all the seats within the US house of representatives and a large number of Senate seats. The result of the US midterms will have a large impact on the Congressional makeup and as a result, the ability of the President to turn his agenda into legislation.

This year, the US midterm elections takes place on Tuesday 6th November.

Why is the 2018 midterm so important?

Unlike other midterms, the 2018 midterm is perhaps one of the most important midterm elections in recent memory. First and foremost, the US stock market is currently on one of its largest and longest bull runs since the second world war. Much of that bull run has been fuelled by cheap credit, positive economic growth and more recently, the Trump enacted tax cuts for business.

But all of this could change because the midterms puts at risk not just Trump’s pro-business policies, but also Trump himself. On the business front, a large victory for Democrats could stifle Trump’s ability to turn policy into law as Congress could move to block legislative attempts by the White House, turning Trump somewhat impotent.

Secondly, there is speculation that should the Democrats gain power in Congress, they could start to bring impeachment proceedings against Donald Trump, putting his Presidency at risk.

Learn how to trade the US midterms with XTB’s free guide

Can we expect market volatility?

In short, yes! Should the Democrats win, they could render much of Trump’s decision making largely impotent at a time when many investors have bought into the promise of a pro business Presidency. Investors buy into stocks on the potential of performance over the coming six months to a few years. Any large scale Democratic victory could severely hamper Trump’s pro business policies and leave investors running for the hills. Additionally, the heightened potential for impeachment proceedings could trigger a rise in uncertainty, which is typically a bearish indicator.

On the other side, a Republican victory next week could give a much needed relief rally to the markets with many polls indicating a likely Democratic victory and any rally could be further boosted by the fact the election comes after one of the worst monthly performance for stock indices since 2010.

How can you trade this event?

XTB offers both futures and cash CFD markets based on a wide selection of US Indices such as the Dow Jones, S&P 500 and Nasdaq 100. These three markets are expected to see the most volatility in the run up to and aftermath of the election.

If you believe a Democratic victory could trigger large scale losses for US indices, you could open a trading account at XTB and short sell a US index such as the US500 (based on the S&P 500 as underlying). Every point the market falls below your open price results in a profit on the trade, whilst if you’re wrong, evert rise in price would result in a loss.

Learn more about how to trade the midterm volatility with this free guide from XTB.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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David Cheetham is the Chief Market Analyst at XTB UK who began his career trading Brent futures on a prop desk. David took the job after completing an MSc in Banking and Finance at Newcastle University. After initially trading Brent futures, he quickly expanded to cover WTI and some fixed income markets. After two years he branched out and started trading for himself, covering a wider range of assets including indices and FX whilst maintaining his core focus on Oil. David actively trades most asset classes. Whilst his approach is predominantly technical, he is well aware of fundamental drivers impacting markets and uses a combination of both when selecting his trades.