QuantumLogicTrading
Short

TP ON BREXIT VOLATILITY: SELL GBP RALLIES & BUY RISK-OFF DIPS

FX:GBPUSD   British Pound/U.S. Dollar
7 months ago
Thought id put a piece out as my guide for the week for how to trade the 23rd UK EU Referendum vote.

IMO the first rule and most important is - DONT TRADE THE VOTE.

Trying to guess the answer is like trying to win the lottery, so instead i advise taking a position on the volatility, as volatility doesnt discriminate, it trades both ways.

Trading the volatility:

- The asset most hit by the UK EU Referendum uncertainty is FX, with GBPUSD             1wk ATM implied volatility closing the week at a whopping 48% - as high as levels from the financial crisis.

- GBPUSD             spot and volatility price is trading somewhat at the mercy of the UK Polls (i suggest checking them every few hours or so for updates if you want to trade any GBP or JPY pair the next two weeks) - intuitively, when the polls have been BREXIT biased - as they were at the front of last week, we saw GU plummet to 1.40 flat and then towards the end of the week as the polls tipped towards bremain, we saw GU recover somewhat to 1.44 almost.

- I expect the same at the start of this week - GBP will open higher today as polls over the weekend tipped into BREMAIN's favour - supported by the tragedic murder of one of its supporters which consequently lead to a prohibition on campaigning and the "stay" party gaining more publicity).

-Therefore I suggest SHORTING GBP rallies as with volatility trading at the 48% level, probability supports that GBP wont be able to hold onto any strength and will at some point conceive considerable downside. Further, the BREXIT/ BREMAIN Polling balance is likely to toss and turn - (http://www.bbc.co.uk/news/uk-politics-eu-referendum-36271589) - so Fading/ Selling rallies on the back of any new BREXIT/ Leave Polls out is advisable.

- GBPUSD             - SELL @ 1.45/6 - lows of 1.40 from last week or 1.385 is the next support level for TP
- GBPJPY             - SELL @ 151/2 - Lows of 140.5 is the next support past 148, however, 1.455 are lows from last week
- GBPCHF             - SELL @ 1.39/40 - Lows of 1.338 are in sight for TP, or 1.358

- Reward for all is upward of 500pips, Risk is no more than 250pips so IMO this provides a great trading opportunity

My 3 conditions for shorting GBP on rallies is:
1. GBP must be trading "expensive" at the levels suggested above - making reversal more likely.
2. A recent poll is in favour of leaving
3. Volatility is high and Risk Reversals trade in favour - both putting a dampener on long term stability.

See my previous articles on which cross is best to trade - I still believe CHF is the best cross, it has the best long run SHORT possibilities too.

Finally, Safety assets e.g. Gold             and US Bonds are tradable ON PULLBACKS also. Gold             and Bonds have been on significant rallies (illustrating the market risk) recently, so I advise buying them on any 1-5% pull backs that we may/ may not get - However, the risk-off asset play was much more profitable several weeks ago (as i suggested). Much of the "easy liquidity" has been eaten up in the last 2wk rally - hence only buy pull backs.

In my opinion, the front end of the week will have the best conditions to trade in, volatility will be at its highest and i predict a level of "calmness" emerging on Wednesday/ Thursday as the result is awaited and as volume drops, thus I do not recommend trading on Weds/ Thurs - execute on the rallies expected on Monday and TP before Wednesdays London session at 8am GMT.

On a UK STAY VOTE we could see massive 5-8+% rallies in GBP (depending on how depressed it is) and mirrored strong sell-offs in JPY, Gold             and Bonds - hence why i say DO NOT TRADE THE VOTE.

I will be posting updates on Volatility as soon as the market opens.
7 months ago
Comment: Another key part of information - I suggest keeping an eye on UJ and using that as a measure for GBP direction, it has traded with a VERY strict range of 30 pips.

The price action of GBP pairs is somewhat compromised by its high volatility (e.g. price action is so volatile it is hard to calll tops) so instead use UJ which is trading with discipline.

1. When UJ falls, this CONFIRMS GBP downside - as it shows a tightening of risk appetite, Lower GBP is the risk-off play.

2. When UJ rises, this CONFIRMS GBP upside - as bets on GBP upside is the more risky move given the absolute event uncertainty, thus JPY weakening confirms the market wants to take more risk with GBP upside plays
7 months ago
Comment: All trade conditions have finally been met
1. we have a "Leave" bias poll 45% vs 44% (3000 people).
2. UJ is selling off indicating a risk-off shift in the market which supports gbp shorts.
3. Shortly ago we were at key handles, GU at `1.47 mid, GCHF at `1.41 mid which was perfect resistance levels to get short.

I expect us to now realise some downside volatility e.g. GU to 1.42 and GCHF to 1.38
thomashvu PRO
7 months ago
thank you for your insight!
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QuantumLogicTrading thomashvu
7 months ago
My pleasure - check out my new post on using UJ to help with GBP short execution!
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dead2live
7 months ago
Look forward to your updates. Much appreciated! I'm new to trading. I picked a heckova time to start.
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QuantumLogicTrading dead2live
7 months ago
thanks, I appreciate your support - and yes you have picked an interesting time (i suggest keeping your cash away for now - theres safer plays to be made next week once this is over)!

You can have a personal update:

1. I am not looking to take any risk at the moment - the options market is going crazy, we have an inverted volatility smile curve (rarely ever seen), whilst GU and GCHF volatility is trading at 120%+ which is 50% greater than back in 2007/8.

2. Nonetheless, we are seeing 50% more demand for downside options vs upside options, this indicates that the market is likely covering the BREXIT potential and/or wanting to own some GBP downside as gbp trades expensive at the moment.

3. In the spot market, we are seeing GBP stronger across the board, with UJ reaffirming the GBP higher move as it also trades higher (risk-on attitudes).

4. My best play in this market, given that the market hasnt realised the downside i expected (1.42 etc), is to fade/ sell the extremes we see on thursday/ friday.. e.g. I will probably short GBPUSD and/ or GBPCHF on friday once the highs have been realised (assuming they vote stay), as historically, GU doesnt hold the rallies from a "remain" vote and i think this will be the case for this vote too (e.g. any rallies wont hold for more than a few days).

+1 Reply
QuantumLogicTrading dead2live
7 months ago
if you are looking for a long-term trade, I like buying XAU/USD (gold) at prices of 1260 -
RISK-OFF YEAR: BREXIT & US PRESIDENTIAL ELECTION: BUY GOLD @1259
- there is 10% upside to be made, in my opinion i advise putting a small 0.01 buy contract on and leaving it for a few weeks/ months as it serves as good macro risk hedge in a year where there are plenty of event driven risk-off/ gold buying oppourtunities e.g. presidential election, brexit, US Rate hike cycle, economic uncertainty for japan, europe and china etc - gold hedges against all of these and hence is a good buy and hold.
+1 Reply
dead2live QuantumLogicTrading
7 months ago
Excellent suggestion!
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