Trading Lessons From “Brexit”

In Blog by Michael Arnold

coffee with union jack and an brexit referendum note with yes checked

coffee with union jack and an brexit referendum note with yes checked

Unless you’ve been sequestered in jury duty on an O.J. Simpson-like trial of the century, you have heard by now that the citizens of the United Kingdom voted to the leave the European Union. The result was a surprise, as the polls, the UK odd makers and the media alike, all predicted that a the remain campaign or “Bremain” as it was being called, would win. It lost and markets reacted. The GBP traded down to levels we haven’t seen since 1984. UK Stocks were hammered with the FTSE futures falling over 8% (which would be the 3rd or 4th largest fall in history) and the Dow Jones Futures falling over 600 points. Why such a reaction? Because the result was a surprise to the markets. The markets got it wrong.

The lesson for traders is one that often needs to be experienced, for stubborn traders to believe. Markets hate uncertainty and traders hate surprises and there will always be uncertainty and there will always be surprises. News that effects markets happens at scheduled times as well as at times you are not expecting. This is why, if your goal is to be successful long-term, you MUST think about risk first. New and novice traders always go into trades thinking “how much am I going to make” and take excessive risks to chase the money. This is the lesson. How much can I lose and can I survive the potential loss, is replaced by “If it wasn’t for xxxxxxxx happening, my trade would have worked!”. Well, xxxxxxxx happened. It happens quite a bit more than markets would like to admit.. If you don’t anticipate, almost EXPECT xxxxxxxx, you will have that one big blowout-loss that ends your trading.

IMF Chief Christine Lagarde, prior to the Brexit vote spoke of the consensus of experts and economists all saying the same thing; a Brexit would be disastrous and will not happen. We will see about the former, but the latter DID happen. There is a lot blood in the streets this morning from traders who believed the unexpected couldn’t happening traded as if it couldn’t happen. Learn the lesson now, before the next surprise event happens and it’s your blood getting mopped up.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.