Cutting through the Brexit market noise

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Cutting through the Brexit market noise: an experience of a trader’s profitable strategy

To Brexit-watchers, the past few weeks have been something of a circus. Diplomatic relations (not to mention domestic Conservative comradeship) hit a major, market-moving snag when embattled UK Prime Minister Theresa May optimistically put forward her Chequers plan to a delegation at Salzburg on 20 September.

So how is a forex trader with an eye on the news to make sense of the constant market buzz and develop a robust enough strategy to profit from turbulent times? FXTM’s Senior Staff Writer Kirsty MacSween takes a close look at a trader who has successfully negotiated the trials and tribulations facing sterling in late September and early October.

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OnePlus87 is a Strategy Manager with FXTM’s copy trading programme, FXTM Invest. Less experienced or time-poor traders can select a suitable Strategy Manager and automatically copy their trades in exchange for a percentage of any resultant profits. Investors can research the risk profile and trading history of the programme’s 2000+ Strategy Managers to find one with a trading style that suits them and their goals. To help them make an informed choice, each Strategy Manager has their own page that captures a huge amount of detail in regards to their trading style, history and statistics. Looking at their trades on just one instrument – the EURGBP – we can see how OnePlus87 weathered the turbulent markets in the wake of the Salzburg summit.

With the onslaught of recent market-shaking headlines surrounding the global stock sell-off, the Italian budget crisis, and trade war tensions, the Chequers fiasco might seem like a lifetime ago. But cast your mind back to 20 September, when May presented her proposed Chequers plan for an exit deal to the President of the European Council, Donald Tusk, and the President of the European Commission, Jean-Claude Juncker. It was roundly rejected. The prospect of the UK crashing out of the EU without any deal at all suddenly was no longer unthinkable – it became a very real possibility. The pound slumped and the EURGBP shot up by 1.2% from 0.88 to just under 0.90.

The pound is obviously profoundly affected by Brexit-related news. Developments that suggest that the transition is not going to be nearly so rosy as Westminster hoped naturally cause investors to shy away from sterling. The doom-laden headlines about the future of the British economy would seem to suggest that it would make sense to trade on the expectation that the pound would drop against the euro on each fresh announcement.

However, an analysis of OnePlus87’s trades during this period shows the importance of not being overly swayed by volatile upswings. A clear focus on fundamentals – overarching macroeconomic factors rather than short-term sentiment – proved in this case to be the most profitable course of action. Despite the sharp spike following the Salzburg summit, the pound has actually been fairly resilient in the face of a no-deal Brexit. The EURGBP has been showing a relatively steady downtrend since 21 September. This is due to a mixture of factors, including a loss of confidence in the euro (thanks in part to tension in the eurozone regarding Italy’s controversial budget) coupled with strong economic data coming from the UK. In the midst of the Brexit turmoil, the UK has enjoyed one of its strongest economic quarters since the referendum, with 0.7% GDP growth. In contrast, the EURGBP had fallen close to 3% since the Salzburg summit by 10 October. Clearly the markets are not shunning the pound in favour of the euro as much as a trigger-response to the news might make you expect.

OnePlus87’s trades are an example of the benefits of practising discipline and using fundamental research to validate trading decisions. From the Trading Review tab on their Strategy Manager page, we can see they kept their positions open for long periods of time, and chose only to sell when they judged the time was right to close.

We can extrapolate that too narrow a focus on the headline news runs the risk of ignoring other important fundamental data points – not least that a messy Brexit would inevitably have a negative effect on the euro as well as the pound. By keeping a cool head, taking a longer-term outlook and considering a wide range of factors in their strategy, OnePlus87 was able to ride out the shorter-term, news-led volatility and make a profit by going short on the EURGBP. As ever, a patient and educated approach could provide an excellent chance of success in the forex market.

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Please note that the above article describes a specific example of how a trader made a profit in the financial markets using a combination of fundamental and technical analysis. It is important to remember that the markets are always unpredictable and you have an equal chance of making a loss if market movements do not go according to your plan. It’s crucial to always keep this risk factor in mind.

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