As you can see from yesterday’s price action, anything that seems to keep the status quo in regards to the UK is going to be viewed as a “RISK ON” event. The opposite will happen if that status quo seems to be in danger of being disturbed. In that case, it will be regarded as a “RISK OFF” event.
What this means for those trading is very simple – either get to the sidelines and sit this upcoming vote out or take your chances on a dice roll over which you have no control whatsoever.
It is one thing to make an educated guess on an USDA crop report, cattle on feed report, hogs and pigs report, etc. At least there is fundamental data that can be analyzed ahead of the reports to come up with a realistic projection. It may or may not be close to what the pencil pushers over at the USDA report come up with but at least it is based on something solid.
In the event of a vote in which no one has any idea how the actual event is going to turn out, you are not trading; you are gambling instead. My view on this is if that is what one wants to go, head down to Vegas where at least you can have the pleasure of watching beautiful women as the house takes your money from you.
Trading is about Risk/Reward based on analysis of either chart patterns or fundamental data. Putting on large positions ahead of an unknown event outcome is simply not wise if you wish to remain in this profession for long.
If you want to use some options to protect existing positions – that is one thing, but do not go into this vote without some sort of protection in place. If you need it, you will be glad you owned it ahead of the vote. If you do not need it, consider it the cost of insurance and then forget about it and move on to tracking the price action after the event.
What this means is that any sort of “analysis” which extrapolates future action in some of these major markets ahead of the Brexit vote is not worth much, truth be told. It could all go out the window on a market reversal if the vote comes out differently than expected.
Certain markets are not going to be as keenly sensitive to this vote as the bond markets, the currency markets and the equity markets, and of course, the gold market. Those are okay to remain in based on your chart pattern and what side you are on.
The only position I am going to hold going into this report among the major markets is long some puts on the British Pound. Yesterday was a good day to pick some up on the strong rally in that currency as they are a cheap bet on the vote for “LEAVE”. If not, the Pound will probably rally further and they will not be worth that much but when you do not have to pay much for some cheap exposure, that is a risk worth taking since you know precisely what the amount being risked is ahead of time. That is all one can lose. With a futures position or a stock position in something closely tied to Brexit, you are risking a lot more.
My advice is to scale back your position size, or get some protection or get flat by moving to the sidelines and sit back and enjoy the ride. It is a lot more fun watching some other fool getting his stomach twisted in knots riding on some roller coaster at the amusement park than it is being the dupe doing the upchucking.
Stay nimble, and smart.
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