US-China trade relations have escalated to a historic - and fearful - level. After the US launched an investigation into Chinese trade policies in 2017, not many analysts believed negotiations would ever get this bad and cause such widespread market turmoil. Yet for some, it is only the beginning.
In this article, we discuss the current US-China trade situation, the markets reaction and the possible ways to take advantage of some of the biggest moves we've seen for some time. Let's get started!
A Quick Guide to the US-China Trade War
In 2017, the US launched an investigation into Chinese trade policies regarding intellectual property, alleged government-sponsored hacking and infiltration into US companies to gain access to new technology, among many other issues.
Since then, the US has imposed three rounds of tariffs on more than $250 billion worth of Chinese goods. China retaliated in kind in 2018 with tariffs on US imports on around $110 billion worth of goods. However, both countries agreed to halt new trade tariffs in December to allow for talks which have since, not gone well.
On Friday 10 May, the US went ahead and raised tariffs from 10% to 25% on $200 billion worth of Chinese goods. And, even after Trump threatened China to do a deal now or face worse consequences in his second term, China has already announced retaliatory measures by raising tariffs on $60 billion worth of US goods.
The Markets Response to US-China Trade Escalation
The escalating conflict between two of the world's biggest economies drove major risk-based markets lower. On Monday 13 May - the first trading day after China's retaliation - the markets painted an ugly picture:
- The Dow Jones Industrial Average (DJI30) dropped more than 600 points - its worst trading session since 3 January.
- The S&P 500 (SP500) also had its worst day since the beginning of the year falling 2.4% in just one day.
Forex markets saw major moves into the safe haven currencies of Japanese Yen, the Swiss Franc and Gold. Commodity currencies such as the Australian dollar - heavily linked to growth in China - fell to new four-month lows. So, are these moves tradable? Let's find out.
How to Trade Market Volatility
Most market participants are trend following in nature - meaning they trade in line with the trend of the market. One of the simplest forms of entry talked about in many trading books is to 'buy low and sell high'. These are called pullback, or retracement, strategies.
However, on heightened market volatility, markets can move instantly in a given direction as traders scramble to get their trades on - or exit the trades that are moving against them. While there are many ways to trade this type of increased volatility in the market, many traders favour breakout type strategies. As an example, let's take a look at a daily price chart of gold:
Source: Admiral Markets MT5 Supreme Edition, Gold, Daily - Data range: from December 6, 2017, to May 13, 2019, accessed on May 13, 2019, at 10:57 pm BST. - Please note: Past performance is not a reliable indicator of future results.
In the screenshot above, the market often moves between trending periods and ranging periods. The highlighted yellow square box shows the most recent trading range of gold. As prices often move sideways in a trading range it shows that neither buyers or sellers are dominant.
However, even in a trading range, price volatility can start to exhibit some structure in buying and selling activity. For example, the hourly chart of gold paints an interesting picture:
Source: Admiral Markets MT5 Supreme Edition, Gold, Hourly - Data range: from April 22, 2019, to May 13, 2019, accessed on May 13, 2019, at 11:04 pm BST. - Please note: Past performance is not a reliable indicator of future results.
In the above price chart, much of the price action in the sideways range is random. However, before gold broke to the upside, price volatility began to show structure in between the support and resistance lines shown by the ascending and descending black lines.
The move into safe-haven assets, on the back of escalating US-China trade tensions, helped gold breakout of its trading range to the upside. After the first hourly bar broke out and closed above the upper resistance line, traders could have entered a buy, or long position, on the close of the bar around $1,291, with a stop loss at the low of the bar around $1,282.
If the market fell and hit the stop loss, the trader would lose 9 points. If trading at the lowest volume, or lot value, of 0.1 this is the equivalent of losing $90. If the trader held on and closed it at the end of the day around $1,299 it would have resulted in a profit of around $80. With no US-China trade deal in sight, how are you preparing for more volatility flows?
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