Brexit 2019: A once in a lifetime trading opportunity?

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  • 22.01.2019
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Brexit trading opportunity

On January 15, UK prime minister Theresa May’s Brexit deal suffered the heaviest parliamentary defeat in history for a sitting prime minister. This turn of events has drastically increased the volatility and uncertainty of the manner of the UK’s exit from the EU, planned for 29 March.

This once in a lifetime situation is now creating unique trading opportunities for savvy traders.

Today, we outline the upcoming key events you need to know about, what could happen this year with Brexit and highlight some short term and long term trading opportunities – developing right now – that just may make it onto your Brexit trading plan.

Understanding Brexit ‘Plan B’

While Theresa May may have suffered a humiliating defeat in the Houses of Parliament, a day later she survived a vote of no confidence on her role as prime minister. It is now her job to bring a better solution – dubbed Brexit Plan B – to her party and Parliament before the next crucial Brexit vote which is currently reserved in the House of Commons for the 29 January.

While the details of Plan B are still rather sketchy, the outcome of the vote on it could trigger a series of unprecedented events and explosive trading opportunities as we highlight below:

Brexit 2019: The possible outcomes

  1. The UK leaves the EU on 29 March without a deal.
  2. A second vote in Parliament: After losing the first Brexit vote, Theresa May could modify the deal and try for a second vote.
  3. A second referendum: This would require an extension of Article 50 (the law in the Treaty on European Union that begins a member’s state withdrawal from the EU) as it could not begin before 29 March. According to a new Opinium poll for the Observer, voters would back staying in the EU over accepting Theresa May’s current Brexit deal.
  4. A general election: Theresa May could decide that the best way to get her deal through is to hold an early general election, like she did in 2017, successfully beating the opposition parties. Opposition leader Jeremy Corbyn prefers this route, but it requires two-thirds of all MPs to support the move.
  5. Another vote of no confidence: Corbyn’s Labour party could call another vote of no confidence in the government at any time. If May wins again then she will press on with her plans. However, if the current government or an alternative government cannot win a vote of no confidence then an early general election would be called.
  6. A major renegotiation with the EU: Instead of carrying out minor tweaks to the deal on the table, Theresa May could call for a complete renegotiation with EU leaders. However, the EU leaders would need to be willing to come to the negotiating table yet again. In this event, an extension of Article 50 would be necessary.
  7. Parliament takes control: Some ministers have suggested to use the upcoming Brexit debates to pass an amendment to allow more time to debate a new Brexit bill. The bill, proposed by Conservative MP Nick Boles, would mean that if no Brexit deal is approved by the end of February the prime minister would have to seek an extension of Article 50.

While it is not yet clear which route the UK will end up taking, certain markets are already presenting interesting short-term and long-term opportunities for traders who want to take part in light of the uncertainty.

Short-term Brexit trading strategies

Before the UK’s exit from the EU on March 29, traders can expect plenty of volatility as market participants try to align themselves with one of the possible outcomes highlighted above. Currently, the British pound is setting the tone for short term Brexit trading. Even the 12 month chart of the widely traded pair GBPUSD shows huge price swings in the market.

Source: Admiral Markets MT5 Supreme Edition GBPUSD, Weekly – Data range: from 12 April 2015 – 20 January 2019, performed on 20 January at 3:33 PM GMT. Please note: Past performance is not a reliable indicator of future results.

However, what has excited traders the most is the fact GBPUSD moved higher after May’s recent defeat. Why is this important? Because it seems traders are now banking on an extension of Article 50 (delaying the UK’s exit from the EU), a softer Brexit and the fact that the majority of lawmakers in the UK are now starting to oppose a possible no-deal Brexit scenario.

The most recent intraday chart of GBPUSD shows this positive – yet short term – sentiment quite clearly:

Source: Admiral Markets MT5 Supreme Edition GBPUSD, H1 – Data range: from 26 December 2018 – 20 January 2019, performed on 20 January at 3:53 PM GMT. Please note: Past performance is not a reliable indicator of future results.

The hourly chart of GBPUSD above shows a clear trading channel between two significant parallel lines of support and resistance – highlighted by the thick blue lines. Short-term traders would look to buy and sell of these levels using powerful combinations of trading indicators and price action to help in timing the trade and risk managing their trades appropriately.

What is the short-term trade?

OPTION #1: Traders will most likely keep the GBP/USD contained in between this trading channel while uncertainty remains. This may provide new trading opportunities for short-term traders to buy and sell off these levels while it continues to trade in the channel.

OPTION #2: A breakout of these levels on the back of a major news announcement regarding Brexit could see an explosive directional move that could last for some time. Short-term traders could try to anticipate a breakout of these levels – long or short – in an attempt to position themselves early for a big move.

OPTION #3: Do nothing. Some traders may want to wait for more clarity before making a decision on whether to buy or sell.

Trading comes down to knowing your own risk tolerance levels. The balance is between having enough risk capital on the trade to make it worthwhile but not so much that a series of losing trades – which can happen – wipes you out.

Long-term Brexit trading strategies

Depressed prices in UK assets have started to attract the attention of longer-term value players with some fund managers, such as Colin Morton of Franklin UK Equity Income Fund, citing that the “type of Brexit deal the UK leaves with is very much a short-term choice”.

And, as Morton points out: “If you don’t position yourself in advance and the Brexit deal is not as bad as expected, domestic stocks will rally so quickly and so hard that you’ll struggle to buy them”.

Maybe that rally has already begun?

Source: Admiral Markets MT5 Supreme Edition FTSE 100, Weekly – Data range: from 29 May 2005 – 20 January 2019, performed on 20 January at 4:53 PM GMT. Please note: Past performance is not a reliable indicator of future results.

The above fourteen-year chart of the FTSE 100 CFD shows that since the end of the 2008 financial recession the UK stock market has fared quite well – even though the price swings have been quite large.

However, perhaps the most interesting element is the fact the FTSE 100 CFD – which matches the index of the largest 100 public stocks listed on the London Stock Exchange – is trading at an historic level of support that technical traders call a trend line (highlighted by the thick blue ascending line on the chart).

What is the long-term trade?

OPTION #1: Traders may look to use the long-term trend line on the FTSE 100 CFD as a springboard for further upside and use trending indicators – such as moving averages – to help assist in finding new buying opportunities and holding until new all-time highs.

OPTION #2: Some traders may try to identify individual stocks that could explode higher, or lower, on any new, major developments regarding Brexit. For example, traders could trade on the share prices of major UK companies such as EasyJet, Unilever and Barclays Bank.

OPTION #3: Do nothing. Some traders may want to wait for more clarity before making a decision on whether to buy or sell.

Conclusion

There still remains some uncertainty on the possible outcome of Brexit Plan B. However, some markets have already started to position themselves accordingly. While opportunity may favour the brave, it may prove wise to use supportive tools such as stop losses and volatility protection settings to minimise trading risks while maximising any gains.

With both short-term and long-term trading opportunities available right now how will you be trading Brexit 2019?

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