Forget playing the numbers game in guessing the percentage moves in markets
Picking a number is a folly at the best of times. So and so bank says the pound will move 10% one way on an exit, or 5% the other way on a remain, that's great but the numbers aren't tradable. What will help our trading is weighing up the potential volatility of either direction after the vote.
The reaction after the vote is simple to understand;
- Exit - Big losses, negativity will last months
- Remain - big gains, positivity will last days
How do I know this?
This event is a huge one off. It's not the Scottish referendum, it's not a general election, it's not central banks, it's not economic data. With the exception of the Scottish vote, which was small in potential impact (relatively speaking), the rest are proverbial everyday events. The referendum isn't. A vote to leave will be massively impactful both for the UK and Europe and will bring a prolonged period of uncertainty and negativity that will be felt in markets for months.
A vote to remain will be big in itself and there will be much relief in markets but it won't last. Traders have been reducing risk and taking their money out of assets. The latest figures from BOFAML show investors are holding the most cash since 2001. I suspect there's a fair amount of that held due to the vote and that will come flooding back on a stay vote. The thing with relief rallies is that they run out quickly, and far quicker than uncertainty falls. A stay vote maintains the status quo so nothing really changes between the UK and Europe between the night of the 22nd and the morning of the 24th. Everyone will go "hooray", all that money will come back into assets and in a weeks time the vote will be forgotten and we'll be back to moaning about the economy, the BOE and the same old rubbish.
Whatever trades you choose to take before, during or after the vote, you need to know the kinds of market you'll be in. Will you be jumping into a 500 pip dip in the pound a day after a leave vote knowing that there's going to be months of further uncertainty? Should you hold a long pound trade for too long on a stay vote knowing that the positivity will run out quickly? It's not about numbers or direction, it's about knowing what environment you are in and how you are going to react to it. First and foremost it's about staying safe.
I don't want to labour the point about me staying out of trading this event (at the moment) and if you are trading it, make sure you do so appropriately. This is not going to be an event for 20 pip stops. It's not going to be an event for 100 pip stops. This won't be an SNB moment, as the market still has that fresh in its mind and is taking appropriate precautions. That doesn't mean it won't be far off from it. Remember that while you're playing in this big market, the likes of JPM and Goldies are super tankers, and are able to navigate the stormiest seas. You and me are no more than a person on a lilo in the middle of the those same stormy seas. As long as you understand that, you have no excuses for losing vast sums of money
