Trading Brexit - UK and EU

Carefully would be my advice! All too often traders get sucked into the news and event story (Brexit) and end up coming out the other end battered, bruised and a little lighter in the wallet.

There is always a temptation to trade the markets when there is the greatest volatility and while this offers the greatest chances of success, it also offers the greatest chances of failure. The opportunity to make 50 – 100 pips in a few minutes is often impossible to ignore. Like a free bet on the favourite in the Durban July to a gambling addict.

“Brexit, United Kingdom Withdrawal From European Union

The difference is that we are traders and there are no free bets out there. This has the potential to be the single biggest market mover since the Swiss National Bank removed the peg on the CHF back in January 2015 or the collapse of Lehman Brothers in September 2008. While the race is fairly close as to whether Britain will choose Brexit, I don’t believe that the possibility is full priced in.

The SNB fiasco caused some of the biggest brokers to go under (Alpari) and the biggest (FXCM) to seek an emergency bailout package for which, I believe, they are still paying for. As a result, I expect most brokers to increase their margin rates, and possibly spreads, considerably. This may result is slippage (positive and negative) for customers as liquidity is reduced and the swings across equities, FX and even some of the commodities are exaggerated.

So how do we trade volatile markets? The 5 point Brexit plan:

1. Decide how long you expect to be in a trade. If you have long term view then you might be able to ignore some of the volatility, widen your stops and trade with a smaller stake size. The noise will take care of itself because you are not looking for short term gains, you are in it for the long haul.
2. If you are looking to trade intra-day, then you really have to look at your stake or volume size. Brokers are likely to increase margins by 3-10 times what they currently are so you should be reducing your stakes by a similar amount. You will still be able to make large gains using a smaller stake because the moves are likely to much greater than under normal circumstances.
3. Your discipline and emotions will be tested to the max. Watching the markets move around like a yo-yo will tempt even the strongest into the market. The best option may be to stay out because often your best trade, is no trade at all. If you are in, and you have got your staking right, then move your stops and limits accordingly. If you are prepared to lose R5,000 on a trade without damaging your account too much then that should remain the same. Your smaller stake will allow you to move your stop further away and absorb the curve balls the market will throw at you.
4. Don’t over trade! Having positions in a number of different markets or many positions in the same instrument, but at different levels, will expose you to greater risk.
5. Formulate your plan and trade accordingly. Your emotions will be high and planning will be a key to success. As “they” say, fail to plan … plan to fail. If the setups are not there, then don’t go looking for a trade just to be involved.

It is certainly going to be an exciting few weeks. Brexit potentially has huge implications for the global economy and either way there will be some exciting trading opportunities.

Trading on derivative products can result in losses that exceed those on deposit. Please ensure you seek professional advice and only trade with funds you can afford to lose.

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