The Countdown To Brexit: Here’s How To Protect Your Capital

Written by Juan Kotzee on April 1st, 2017

The Countdown To Brexit: Here’s How To Protect Your Capital

 

Are you prepared for the Brexit market turbulence again?

In just one day Article 50 will be triggered and the exit negotiations will commence…

The first time a country exits the EU. Much like last year’s Brexit vote this historic event is expected to leave its mark in trading history.

The sterling hit 30 year lows during last year’s vote, how will it react this time?

The pound did slump the day after the referendum more than 10% in only one day

Prime Minister Theresa May is to trigger Article 50 on 29 March - beginning formal negotiations on Brexit.

Here's an easy to understand guide to Brexit…

 

What Does Brexit Mean?

 

It’s a word that’s become used as a shorthand way of saying the UK leaving the EU.

Merging the words Britain and exit to get Brexit, this may also lead to a domino effect in other EU countries to exit.

Example France exit will be “Frexit”

 

Why Is Britain Leaving The European Union?

 

A referendum - a vote in which everyone (or nearly everyone) of voting age can take part - was held on Thursday 23 June, 2016, to decide whether the UK should leave or remain in the European Union.

‘Leave’ won by 51.9% to 48.1%.

The referendum turnout was 71.8%, with more than 30 million people voting.

 

What Were The Voting Results?

 

The Brexit Voting Results

 

When Will Britain Actually Leave?

 

For the UK to leave the EU it has to invoke an agreement called Article 50 of the Lisbon Treaty which gives the two sides two years to agree the terms of the split.

Theresa May (current Prime Minister) has said she intends to trigger this process on 29 March, meaning the UK will be expected to have left by the summer of 2019, depending on the precise timetable agreed during the negotiations.

The government will also enact a Great Repeal Bill which will end the primacy of EU law in the UK.

This Great Repeal Bill is expected to incorporate all EU legislation into UK law in one lump, after which the government will decide over a period of time which parts to keep, change or remove.

 

What Is Article 50?

 

Article 50 is a plan for any country that wishes to exit the EU.

It was created as part of the Treaty of Lisbon - an agreement signed up to by all EU states which became law in 2009.

Before that treaty, there was no formal mechanism for a country to leave the EU.

It's pretty short, just five paragraphs.

It basically states that any EU member state may decide to quit the EU, but they must notify the European Council and negotiate its withdrawal with the EU.

It goes onto state that there are two years to reach an agreement - unless everyone agrees to extend it - and that the exiting state cannot take part in EU internal discussions about its departure.

But…

 

Will A Deal Be Reached Within Two Years?

 

Probably not, according to Kerr, who as well as drafting article 50 is Britain’s most experienced EU negotiator.

He reckons the government has a less than 50% chance of securing an orderly exit within the timeframe and will potentially have to accept a phased departure lasting much longer, prompting “a decade of uncertainty”. 

Gus O’Donnell, the former cabinet secretary, also reckons it’s highly unlikely a deal can be reached in two years.

Speaking before the referendum he said: “Greenland has a slightly smaller population than Croydon and it has one issue, and that’s fish. So with one issue… it took them not two years, but three. We have multiple issues. The idea that we can do it all in two years I think is highly unlikely.”

 

What Are The Key Points?

 

It’s a long list, and even the topics for negotiation are subject to negotiation.

For example, the UK wants trade talks to be part of the leave discussions, but senior figures in the EU think trade should be discussed separately.

While the UK is still part of the EU it is not allowed to negotiate trade deals with non-EU countries.

Another key topic that will need urgent resolution will be the rights of EU citizens living in the UK and British subjects living abroad.

The government ruled out giving EU citizens guaranteed protections before the start of talks, giving rise to fears that they will be used as bargaining chips.

Other pressing but tricky issues include security, migration and border controls.

 

How To Protect Your Capital

 

Regarding the market movements, traders can expect above-average volatility and dangerous fluctuations in the market moves, which can bring non-standard situations, and traders may be surprised in several ways.

Traders often believe that if they set a pending order such as Stop-Loss or Profit-Target, then the orders will always be filled. This opinion is theoretically correct, but practically very inaccurate. In fact, your Stop-Loss and Profit-Target orders will be filled, but they do not have to be filled exactly at the price at which you originally set your Stop-Loss or Profit-Target order.

Spreads my increase just a few minutes before the Brexit news therefore if your stop loss is placed too close, you may be out too early before the price moves in the other direction.

Price spikes may happen which can stop you out prematurely if your stop loss order is placed too close to the price action on that date just a few minutes before the Brexit news.

Do not trade heavy, meaning, do not risk a lot of your account in this trade.  Never risk more than 2% on a trade.

Make sure you close your trades before the weekend.  We might see some weekend gaps on GBP currencies.

So, keep that in the back of your mind should you decide to trade the Brexit news!

Until then, here’s to profitable Forex trading.

Juan Kotzee | The Money Lab

Juan Kotzee
Trading Expert
The Money Lab