Why is event driven trading important?

Event driven trading is important as it’s an approach that many hedge fund managers use. It can make up a large part of the volume when investing and trading in stocks. 

From the perspective of an individual trader, event based trading — at least in its strictest definition — is very difficult to do. It requires complex technical analysis. As an example, hedge funds employ specialist teams and traders to exploit the potential from event driven trading.

But as we’ll look at below, you can use a form of event trading in your own strategy, one that’s developed for macroeconomic fundamental events.

What is the best event driven strategy?

When defining the best event driven strategy, it’s worth considering what each one has in common. At their heart, the best event driven strategies share the following features:

• The ability to identify potential fundamental events that’ll impact market price
• They allow you to analyse the possible scenarios and outcomes around these fundamental events
• Based on these, they give you the ability to develop a strategy and view. This can benefit you through profitable trades when the events occur and after they occur

So, how can you benefit from this event trading approach if you don’t have access to the specialist analysis teams that hedge funds do? Well, you can still analyse bigger, macroeconomic and geopolitical events on a more basic level.

It’s possible for you to look at upcoming macroeconomic data events and analyse how markets have reacted in the past. You can also look at when these data releases have beaten, missed or have been close to the consensus for the data.

You can do this with a formal, defined event strategy approach. Crunch the numbers and build a set of rules that define what should be done from a trading perspective and in differing scenarios. 

Many seasoned traders, though, will trade with this approach by simply using their experience and ‘gut feel’. They’ll use this to quickly decide how far a market would be expected to move on any data release.

They may then decide to ‘go with’ the price action — that is, trade in the direction of the price move. Or they may decide to ‘fade’ the move — enter a trading position in the opposite direction to the initial price move.

You could use a similar approach when looking at geopolitical events. These events could include:

• Elections
• Trade negotiations
• Natural disasters

Although this approach isn’t an event driven strategy in the strictest definition, it’s a trading approach that you can use when reacting to defined market events.

Event driven trading summary

In this lesson, we’ve looked at what event driven trading is and why it’s important. We’ve also explored event driven trading strategies and have taken a look at the types of corporate and geopolitical events that can impact your trading outcomes.

The key takeaways from this lesson are:

• When applied to individual stocks, event driven trading is a solid strategy for you to use. But it requires strong analytical abilities and specialities that individual traders might not have access to
• However, you can apply a form of event driven trading to larger macroeconomic and geopolitical events. This strategy can be used by individual traders to make profits. It’s certainly worth applying to your analysis 

In our next lesson, ‘What trading style suits you?’, we’ll pull together all of the different trading strategies we’ve reviewed in this module. We’ll look at what could be the best trading strategy for you to use moving forward.

For more trading strategies and further insight, you can also browse our entire trading strategies module, trading strategies blog and navigate to our latest financial events page.