PLUS Top 3 tips from BBC2’s ‘Traders: Millions by the minute’
How much more of a beating can the poor old Pound can take?
It’s already lost around 6% of its value against the US dollar since July’s highs and we’ve still got the biggest event Sterling has faced for decades looming ahead – the result of the Scottish Independence vote is due to hit the wires on Friday morning!
So will a ‘Yes’ vote send Sterling plummeting even lower or has that risk already been priced in?
Or will a ‘No’ vote take the boot off Sterling’s throat and let it spring back to its feet?
Who knows, but we’d better take a look at some ways to trade the big event, and we’ll do that in just a minute.
But first…
What we can learn from BBC2’s new trading documentary
‘Traders: Millions by the minute’ is a two part expose of the industry as it stands today.
Monday night’s episode followed the professionals – the hedge fund managers, pit traders, and algorithm firms – and it looks like they’ll be shining a light into the home offices and trading rooms of the lone-wolf guys next week.
I always get a thrill from seeing the trading pits in action and they followed a couple of pit traders at the Chicago Board of Trade last night. Virginia McGathey was one who is very well known down there, she commands respect from even the most grizzled, cigar-chomping guys.
They put her through the mill over her sexuality in her early years but she did more than anyone to wedge the door open for more women to follow her into the pits rather than stay sidelined as clerks and runners.
And what was really telling is how the pit traders all turned to watch the computer as the big crop report was released. The floor itself was deathly silent as they watched the price move on the monitors instead.
In its heyday the pit was action central. They would have been jostling for line-of-sight, and screaming out trades as orders got phoned-in to the pitside brokers, but that’s all gone now. It’s all on the computer screen.
And on the flip side of the coin, IMC Financial in Amsterdam was one example of a firm at the cutting edge of trading technology.
They are a high-frequency algorithm firm doing some eye-popping levels of business – $100 Billion per day!
Their traders were described as being like pilots. They oversee the ‘autopilot’ system – the computers that do the actual trading – and just need to tweak the settings from time to time, stepping in only when they need to.
But I think the most useful part of the program for us was the coverage of the London proprietary trading firm that offered training.
You saw their trainees wrestling with the same issues we all must overcome… the risk of overtrading, the fear of pulling the trigger, the frustration of losing trades…
But there were three key nuggets of advice I picked out of that footage:
1) Losing money is part of the job: that came up very early and it’s still something a lot of traders try to avoid at all costs, even to their long-term detriment. Will – one of the training firm’s partners – told the story of how he was fired from an old job because he was unable to manage losing days. He kept fighting the market, making his losses worse, because he was trying too hard to get back in front.
2) A good trader manages risk and controls emotional state: a great example was given by Piers when he explained how you should sit back after a big winning trade. Feelings of euphoria can actually cloud your judgment and chances are you’re going to give a chunk of money straight back to the market if you keep trading!
3) It’s all psychological – success and failure become exaggerated: there was one trainee – Carlos – whom they joked must have repetitive strain injuries because he was hitting the mouse buttons to trade so often, he was trading nine markets at once at one point! He’d made good money on the demo platform but went to pieces when it came to trading the firm’s money. Strangely, he went straight back to winning ways when he used his own money instead. Now there’s an insight to the way your mental processes can interfere with your trading!
Anyway, it was a very good documentary, well worth catching on BBC’s iPlayer if you didn’t see it.
And don’t forget the second part is on next Monday too!
Right then, let’s now take a look at the British Pound ahead of the Scottish vote.
Two ways to trade the Scottish Yes/No Vote
The first thing I would say is this is a totally unprecedented event.
Whichever way the vote goes there will be repercussions felt in the markets and you must class it as a high-risk event. Trade only if you’re comfortable to do so and take the information I’m giving you here as ideas for your own trading decisions.
So the polling stations close at 10pm on Thursday night and the result is due on Friday morning. I’ve seen ‘unofficial’ estimates of 7am but I guess it’ll be announced whenever the count is complete.
As always, your first priority must be risk control. This means if you are already in a position by Friday morning, make sure you’re protected with a stop loss.
And if you’ve been trading in the days leading up to the result, make sure you’ve cancelled any working orders you no longer need – no orphaned stop or limit orders left forgotten in the market, I’ve made that mistake before!
On the day itself, if you are looking to trade it (GBP/USD is the obvious market) I think there are two obvious ways to play it…
1) Trade the secondary reaction: wait for the knee-jerk reaction to subside and trade as the market starts to make sense of the result.
2) Trade a Bracket Breakout: ‘bracket’ the market with buy and sell entry orders and trade a breakout either way.
One way to trade the secondary reaction is to follow the breakout higher or lower, wait for a pullback on the first round of profit taking and then enter a trade in line with the original direction of breakout.
Here’s an illustration of how you might do it:
First of all, wait for the breakout to happen. Then as the market retraces, as it pulls back, be ready to trade to the long side (back in line with the original breakout).
So here’s an example of a long trade – we bought as the market started to show some buying interest.
Try to keep your initial stop loss tight – you can see it just below the lows the pullback – and then trail it up behind the market as we move higher. Remember, there’ll still be volatility in the market. Protecting your downside is top priority!
So that’s the conservative way to do it. By waiting for some direction we can lessen the risk of trading events but the downside is you can sometimes miss the move completely.
So what if you have a larger appetite for risk and like to get stuck into the action?
How about taking playing the vote result as a bracket breakout… here’s how you might do it:
This is the picture on the daily chart for GBPUSD (Tuesday 15th September). If we’re still trading inside the range highlighted blue on Friday morning you might consider placing both a buy stop entry order just above the blue range, and a sell stop entry order just below it.
This will get you into a trade in the event the market breaks out either way.
Place a stop loss order to protect either trade, you can look at the 60 minute or the 4 hour chart on Friday morning to find a location that makes sense, and then trail the stop best you can to lock in profits as the market moves.
I’ve drawn two levels of support and two levels of resistance on the chart. That’s where I’d expect to see some profit taking. The market may or may not have the legs to reach any of those levels but do consider tightening up your trailing stop if it does, or even take some profits of the table around those prices.
There is a third way of course and that’s just to stand aside while the dust settles and then get involved on Monday, after the market has had the whole weekend to digest the result. Being flat is sometimes the best position of all!
Anyway, whatever happens on Friday it’ll certainly be an education to watch the market react to the news as it happens. Try to follow along with the action in real time if you can.
Be Prepared: Market Moving Data Coming This Week (London Time – BST)
Wednesday 17/09/14:
09:30 GBP Average Earnings Index
09:30 GBP Claimant Count Check
10:00 EUR CPI
13:30 USD CPI
19:00 USD FOMC Economic predictions
19:30 USD FOMC Yellen Speaks
Thursday 18/09/14:
09:30 GBP Retail Sales
13:30 USD Building Permits
13:45 USD FOMC Yellen Speaks
15:00 USD Philly Fed
Friday 19/09/14:
AM GBP Scottish Independence Vote Result
Monday 22/09/14:
15:00 USD Existing home sales
Tuesday 23/09/14:
08:30 EUR German Manufacturing PMI
Hold onto your hats on Friday and I’ll catch up with you again next week!
