Purely technical trading strategies often struggle to achieve a positive expected return. These strategies aim to avoid macroeconomic influences, such as non-farm payrolls or inflation data, trading only during periods of independent market movement. However, such independent price action often exhibits characteristics of random walk. Consequently, trading strategies based purely on pattern recognition and statistical probability can inherently lead to an expected value of zero, or a negative value after accounting for transaction costs.
Event-driven strategies, in contrast, initiate trades based on major macroeconomic or geopolitical events. The success of these trades does not rely on statistical probabilities but hinges on the trader's ability to interpret the event's trajectory and the unfolding situation. Executing an event-driven strategy does not require the systematic and mechanical approach of a purely technical system. Instead, it demands greater mental agility and rigorous logical thinking.
There is no fixed template for an event-driven strategy. For gold, the Russia-Ukraine conflict that began on February 24, 2022, serves as a classic case for applying such a strategy. In equity markets, the "Baowang dispute" was an event-driven opportunity for trading shares of Vanke. However, these examples are somewhat dated. Let us use a more recent event, the US-Iran conflict, to illustrate an event-driven strategy for crude oil.
February 28th marked the official start of the US-Iran conflict. However, as this was a Saturday, the crude oil market did not react until Monday, March 2nd. On that first trading day, the price of West Texas Intermediate (WTI) crude surged from $67.22 to a high of $73.06, closing at $70.80.
On March 8th, following Khamenei, his son Mojtaba was positioned to become Iran's next Supreme Leader. This development pushed the price of WTI crude to a peak of $113.05, marking the highest price point during the entire US-Iran conflict period.
An event-driven trader must ponder a key question: Why didn't the price of WTI crude jump directly from $67 to $113 on the very first day of the conflict? Why did it take six trading days to reach that interim high?
The answer lies in the processes of information dissemination, psychological adjustment, and market expectation revision. When a conflict erupts, not everyone receives the news immediately. For non-professionals, learning about it a day or even several days later is common. Even those who get the news first often do not commit all their capital to a long oil position immediately. Most participants gradually build their positions as the situation evolves.
The factor of revising market expectations is even more critical. Immediately after the conflict began, market participants speculated on Iran's potential response, which could range from capitulation to determined resistance. As Iran and Israel exchanged attacks during the conflict, the market continuously assessed whether the situation would escalate from "missile exchanges" to ground operations. With expectations constantly being revised, the price action naturally does not move in a single, decisive leap.
On June 17th, the US and Iran signed a memorandum of understanding, effectively ending the conflict. By this time, the price of WTI crude had already retreated from its $113 high to $75.72. In fact, as early as April 8th, when WTI was trading at $99.13, signs of peace talks between the US and Iran were already emerging. A trader with a clear and rational grasp of the geopolitical trajectory could have anticipated the subsequent decline in oil prices at that juncture.
Key Takeaways
This examination of an event-driven strategy reveals that the chart analysis and technical indicators favored by purely technical traders play a minimal role. Instead, an individual's judgment of the situation, particularly their forecasting ability, becomes the decisive factor in navigating the rapidly shifting landscape of event-driven markets.
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