Brexit – How to Trade Around the Storm?
In this issue of the Celestial Trading Tools Educational Blog we will be taking a look into Brexit, probably the most talked about political event over the past few years, what it is, what it means for us traders and how we can trade around the storm within the market caused by this huge uncertainty.
What is Brexit?
I’m sure you all have heard of Brexit by now and most of you know exactly what Brexit is all about, but let’s start at the beginning and take a look at what Brexit is and where it came from.
Brexit is the result of a national referendum within the UK. This referendum took place on the 23rd of June 2016 a result of a 51.9%/48.1% split to leave the European Union was cast. The referendum was implemented by the then Conservative Government led by David Cameron. Since then negotiations and various deals and further votes within parliament have taken place to take steps to leave the European Union all within the midst of mass controversy within the UK with many of those who voted to remain claimed the leave campaign was based on lies and that the majority was in no way significant enough to cause the UK to have to leave the European Union. Further controversy was spread when it was revealed the majority of over 65 voters voted to leave whilst the majority of under 25 voters voted in fact to remain. With these remain voters claiming it is our future and it has been affected by those who will not have to live with the consequences.
Brexit aside from causing mass controversy has seen huge impacts within the foreign exchange markets with the Pound Sterling fluctuating massively most notably around motions of no confidence within specific deals, a vote to block the possibility of a no deal Brexit and other Brexit votes.
From the perspective of the UK, they wish to leave the European Union however will want to keep existing trade deals with EU countries such as Germany and France due to the UK being large importers of goods.
However, from the EU perspective they do not want the UK to leave the Union due to the fact the UK is a net contributor to the EU and losing that will have a knock-on effect of the other countries within the Union.
Obviously, this is a very simplified approach to Brexit and things are much more complex than this however having a simple view of such a complex situation is all we need as traders within the market sometimes.
The Effect of Brexit.
Brexit has had such a large effect on the markets due to it having an impact on 2 of the most traded currencies in the world, the Pound and the Euro.
With every negotiation between the EU and the UK sparks instability and opportunity for investors. However, there is also huge risk within these moments. With such instability it is difficult to predict market moves as we have seen economies fluctuate and the prospect of various trade deals falling through, reduction in good imported/exported may lead to increased demand on other suppliers.
They key point here is that nobody really knows what will happen with Brexit. Whether the UK will still have trade deals with EU countries, if importing goods will still remain cost effective, and so this has a huge knock on effects to investors and also banks. It is impossible for us to see long term strength in a currency when the situation of that country is so uncertain.
How We Can Trade Around Brexit?
One of the issues with Brexit is it is not a scheduled news event or data release such as CPI, Interest Rates, NFP. Therefore, it can be difficult for us to trade around such news affairs as we never know when talks may begin or end.
One option for us as traders is to completely ignore any GBP or EUR pairs within the market however this drastically reduces the number of instruments that we can actively trade.
In our experience technical analysis is still holding throughout these uncertain times, however it is recommended to take extra precaution when trading and advised to move stop losses to break even or even into profit as early as possible to ensure you are protecting your capital (The Number 1 Rule of Forex!)
So, remember if you are trading around Brexit news or trading currency pairs that could be affected by Brexit, trade smart and trade safe!