In simple terms it is about trying to work out the probabilities of the outcome of an event and trade accordingly. For example, you may arrive at a conclusion that the probability of the Fed cutting rates is as high as 90%. Then you can position yourself to hold substantial long futures in rate sensitives. Of course, you have to be a lot more careful if you are going to look at a 50:50 kind of probability.

This approach is popular not only among smart traders and proprietary desks but many large funds also run such event-based funds. This approach tries to bet on specific events like credit policy, union budget, quarterly results, Fed policy etc and then takes a view and assigns probabilities to outcomes. This approach manages to capture the momentum in the best possible manner. To be frank, this is not a very scientific approach to investing but it is a very useful and pragmatic way to capture the momentum surrounding specific events. However, it needs to be remembered that this approach is quite a risky approach and hence proper risk management as well as checks and balances are a must to adopt this strategy. Risk management and having a Plan-B in place becomes a lot more important in such cases.