Geopolitical Risk Trading Strategy (USD/RUB, Rules, Backtest, Performance Analysis)
In the world of finance, geopolitical risk refers to the potential impact of geopolitical events on the economy and financial markets. Geopolitical events include wars, elections, political unrest, policy changes, trade disputes, terrorism, and other types of conflict or instability. Making our trading strategies resilient to such events is an important part of a risk management strategy. What is a geopolitical risk trading strategy?
This article describes one geopolitical risk trading strategy designed for these purposes. Since the fall of the Soviet Union, our geopolitical risk strategy on the Russian Ruble / US Dollar pair made +6444%.
Geopolitical risk is usually bad news for both long-term investing and quantitative trading strategies. But can we turn this around and use geopolitical risk to our advantage to offset losses or even make profits during such events?
Please be advised that the trading ideas in this article are for informational purposes only. This article discusses concepts enabling you to create your geopolitical risk trading strategies.
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First, some words on how to trade the USD/RUB pair after the newly implemented sanctions on Russia:
How to trade the USD/RUB
The price of the USD/RUB pair is currently affected by Western sanctions and the Russian state’s regulatory action. As these factors either intensify or resolve over time, this will affect price further. We need to be cognizant of these risks when evaluating the future of this strategy.
One option for traders is to trade CFDs (Contracts For Difference). CFDs of the USD/RUB pair are available from several CFD providers. Be aware that CFD trading comes with its own inherent risks that any trader should know about before trading them.
Geopolitical Risk Strategy and the Russian Ruble
Over the last ten years, many geopolitical risk events have emerged from actions taken by the Russian state. Nowhere has the economic effects of these events been felt as strongly as the Russian economy itself. As we can see, these events have a strong effect on the performance of the USD/RUB currency pair:
With these historical developments in mind, what would have happened if we had a trading strategy in place which was designed to profit from such sudden and unpredictable events? We will soon find out.
USD/RUB (Forex) As Geopolitical Risk Strategy
The USD/RUB currency pair is part of the Foreign Exchange Market (Forex). Forex trading is extremely difficult, with few good trading opportunities and the risk of great losses due to overleverage.
However, while we will be using the USD/RUB currency pair as our trading vehicle, this does not mean we’ll apply a traditional forex trading strategy. This article essentially creates the opposite of a conventional trading strategy that profits from repeating statistical patterns. Instead, we attempt to ignore these patterns and act on significant non-repeatable events.