Well, to say that right now is an unprecedented time in the world and financial markets would be a massive understatement. Just last week, the UK’s landmark vote to exit the European Union sent shock waves across the globe, and produced record equity and forex market volatility to boot. In fact, this summer may forever be remembered for giving life to post-Brexit markets, as well as for the tragic and senseless acts of terrorism carried out in the US and now Istanbul. And, for traders, this is most certainly a time when many are scrambling to regain their footing and adjust to extreme volatility.
The summertime, remember, is already an atypical time in the forex markets, and a seasonal point where, traditionally, volume, volatility, and often liquidity enter new phases for which traders simply must adapt or face perhaps the most serious consequences all year. To be on the wrong side of a trade in illiquid summertime market conditions, afterall, can be crippling and put your trading account, if not your career, in serious jeopardy.
So, those are the rather well-publicized problems traders face in this post-Brexit market environment, and we’ll not harp on them any longer. Instead, we’ll aim to provide some much-needed solutions for navigating post-Brexit markets and the summertime shifts in volume, volatility, and liquidity that promise to be even more pronounced this summer.
London’s FTSE Index, the US S&P 500 (SPX), and obviously, the British pound (GBP) were among the hardest-hit assets once the markets learned of the UK’s vote to leave the European Union on 23 June. Record losses ensued almost immediately, and while prices “normalized” somewhat since, a dangerous combination of elevated volatility with low liquidity may now prevail in post-Brexit trading. Why, you wonder?
Well, many traders sold in a panic once the results of the vote were announced, and having now dumped risk assets in the early summer months, many aren’t likely to return to the markets in the short term. Plus, with volume and liquidity both traditionally low in the summer months while retail traders tend to take time away for holiday, the bottom line for remaining traders is that there’s a risk of being “trapped” in positions while waiting for a counterparty to take the other side of a given trade(s).
In post-Brexit markets, however, funds may continue to flow into “safe” assets like the US dollar (USD), Swiss franc (CHF), and even old stores of value like gold or crude oil. Meanwhile, rumblings about new rounds of stimulus in Japan, England, and perhaps China are on the minds of traders. Together alongside geopolitics and any post-Brexit “ripple effects” among remaining EU nations, these comprise key intermarket and fundamental factors that bear close watching throughout the coming months. Don’t take even one more trade, however, without considering strategic adjustments that account for post-Brexit market conditions.
Understanding the changing risk environment and adapting accordingly is practically mandatory at this stage. And while it’s not to say that traders should head for the sidelines and avoid trading post-Brexit markets altogether, some degree of risk aversion, more selectivity, and self-preservation are—or at least should be—primary objectives for not only forex traders, but also those across all other markets as well. Prudent adaptations may include:
Smaller trade size: Lower summertime volume and thin liquidity can make for difficulty exiting positions in short order. Due to that, as well as elevated market risk, traders may be advised to trade half or partial size throughout summer and the early stages of the post-Brexit era.
Only trade key support/resistance levels: Choppier price action and wider ranges are likely to take hold now; in fact, they already have. And with that, mid-range support and/or resistance levels are less likely to hold. That may include Fibonacci retracements, trend lines, and moving averages. Major boundaries like all-time and multi-year highs/lows will tend to be stronger, though, and with certain assets like SPX, GBP, and others near such levels, pin bar reversals occurring at those levels may signal the most tradable set-ups for price action traders in the current environment.
Look for confirmation signals: To trade with more confidence and add an element of validation to your trade ideas, try looking for confluence or confirmation signals. Maybe it’s a simple indicator like a moving average that you like to follow, or perhaps you’ll even zoom out to the longer-term charts and ensure that you’re trading in the direction of the prevailing trend there as well.
Trade most liquid assets: Guard against becoming trapped in a losing trade by focusing primarily on major assets or currency pairs, which will tend to have more traders and potential counterparties than exotic or less-liquid markets or currencies. In higher-risk, post-Brexit markets, it’s important to remember that getting in is only the beginning; you have to be able to exit positions safely as well, whether it’s to book profits, or limit losses in the event the trade goes (perhaps even swiftly) against you.
Trade higher time frames: Probably the easiest adjustment in post-Brexit markets is simply to move up and trade, say, the weekly time frame instead of the daily or smaller, intraday frames. Price action on the weekly charts will be much smoother and devoid of the type of volatility now commonly seen on the shorter-term charts. Of course, patterns and set-ups will take longer to emerge and unfold, but for those looking to trade safely and selectively, and use their existing strategy in a post-Brexit environment, a move to the higher time frames may be just the right decision.
One final reminder about post-Brexit trading: The more volatile and difficult trading conditions are happening to everyone, even the pros. The difference? Many rely on a network of their peers to help decode changing conditions and chart their own, unique path to success. Fortunately, you can, too, if you join The Lazy Trader community, where you’ll receive regular market updates and analysis, timely trade ideas and education, and all the support you’ll need to stay safe and successful in these, or any, market conditions. Click the below graphic for full details and to start your no-risk membership today!