3 Things Traders Must Know to Trade Brexit Momentum

Traders and the financial press are talking about Brexit rumours every day now it seems, and frankly, so are we! As I've said before, and as I discussed in detail throughout a lengthy article appearing this past week on select partner sites, I believe that what we now have is something of a "once-in-a-lifetime trading opportunity."

Currently, much is being said and written about the potential for a Brexit and what it could mean for the UK and Eurozone economies, the financial markets, and traders and investors alike. And, if you want to study the issues in depth, you won't have to look far to do it…but right now, I want to give you just the facts and most important bullet points.    

So here are the top three (or so) things that traders need to know to trade Brexit momentum now and in the weeks and months ahead. There's no quantum physics or complex jargon here; just baseline knowledge and information intended to keep trading simple and straightforward…just the way most of us like it! 

The Referendum Date & Key Players

By now, most everyone knows that 23 June is the date for the referendum vote that will decide whether the UK will exit or remain a member of the European Union. And in the build-up to that critical date, volume and volatility have picked up significantly, especially as rumours and rhetoric either for, or against, a Brexit take hold of the markets.

Notably at the centre of the Brexit controversy is UK Prime Minister David Cameron, who won the general election in 2015, in part, because he promised to deliver this referendum. Now, Cameron's focus is squarely on warning referendum voters and the general public about the potential drawbacks and negative consequences of a pro-Brexit vote.

Traders need not hang on the news of each day, but will want to remain in the know nonetheless, as new rhetoric from Cameron, official referendum voters, fellow Eurozone leaders, and policymakers at various government and ratings agencies could have the power to move markets, even presenting risk-controlled opportunities to trade the assets and currency pairs we'll discuss next…

The Most Favourable Currency Pairs to Trade

To know about this event risk is only the first part of the equation; the next is to find a logical and risk-controlled way to successfully trade it. There's no shortage of choices in this case, either, with a number of currencies already on the move, and potential for upcoming opportunities in European equity markets as well. Here are but a few of the top trade targets, with our personal favourite listed right at the top of the list:

GBP/CHF: Already in the midst of a steep and sizable downtrend, this pair has yielded over 30% profits following a reversal that began 1 December 2015. A vote in favour of Brexit would lead to further losses, with corrections to the upside possibly signalling fine chances to enter short on pullbacks

EUR/GBP: This pair is another most logical way to capitalise on upcoming weakness (or strength) in GBP. Because EUR and CHF are so highly correlated, however, it is not advisable to trade both GBPCHF and EURGBP simultaneously

GBP/USD: The dollar would be a prime beneficiary of a vote in favour of a Brexit, and could become the world's only bona fide reserve currency in such a case. Needless to say, GBPUSD would fall sharply on such news

FTSE: Equity markets thrive on stability, and as seen in previous cases like the UK general election and the Scottish referendum vote, the FTSE could rise on the back of the stability that would stand to be restored in the event that the UK votes to remain an EU member

Our Preferred Brexit Hedge Trading Strategy

While some may trade intraday and in response to the latest Brexit news and rhetoric, we'll follow a strategy that's much different. Instead of intraday, why not trade the longer-term time frames like the daily and weekly, looking for opportunities to sell rallies in GBPCHF, our currency pair of choice right now?

Before executing trades, though, remember to ensure that price is at/near a key resistance level, perhaps the downward trend line that's evident on the below daily chart. In addition, exercise due patience, waiting until a viable entry signal appears, like a bearish pin bar reversal, for example. By following these cues, we've successfully added to our GBPCHF short position on two separate occasions, also seen here:

Technical Analysis: Brexit Hedge Trading in GBPCHF

One caveat with this trade, however, is this: It's important to trail your stop close behind any new short positions, because while a pro-Brexit vote would accelerate gains, in the event the UK votes to remain in the EU, the pair is likely to reverse higher in response.