How To Trade All The Brexits of Your Life
First of all props to George Soros who at 80 plus still has more trading skill in his head then all the armies of quants and fraternity boys at every bank trading floor in the world. He saw the asymmetrical risk and he took it and I think I understand why. Like all East Europeans (yours truly included) he has a particularly dark view of human nature. He always bets on the unfortunate tendency of most human beings to make the absolute worst choice possible. Given the fact the many of the low information voters in UK are apparently only now starting to google the words “European Union” and only now starting to understand the full implications of the actions, Soros is once again proven right in his views.
But this is not a column about “have a hunch, bet a bunch”. In fact quite the opposite. Last night K and I hosted a 4 hour live trading session that was undoubtedly the best of our lives. Not because we made a huge amount of pips. We did well (blotter below) -- but many of traders in the room made four, five even six times the amount of pips we banked.
The thing that made last night’s session especially sweet was that we finally put all of our trading skills to work in what was surely the test of the century.
So allow me to deconstruct the key ideas that made trading Brexit such a success so that we may all make them our best practices for the future.
1. Trade small.
Yes, yes, yes I know that I drone on about this point to the level of ridiculousness but it cannot be overestimated. Brexit night was the single most volatile night in the history of the pound. If you traded with so little as 5X leverage you would have been margined out at least 10 times in a period of three hours. I traded at 0.5 lever all night long and never once felt any pressure in what was the most turbulent market in years. In fact the proudest moment of the night for me wasn’t in hitting 10 trades in a row, but in blowing out of my position the moment I realized that was 4X too large by accident. You can hear me on the video saying, “I don’t care if I am right or wrong I just want to be out.” Which was probably the smartest thing I said in years and will forever now become my mantra when I trade these events. Making the wrong size trade and then stubbornly trying to trade your way out of it is precisely how all traders fail. Nick Leeson anyone?
2. Trade the facts not your opinions.
Like almost everyone in the financial markets K and I came into the event convinced that Remain would win. In mature democracies the status quo generally always has the upper hand as people are loathe to vote for the unknown. So we were fully with the bookies and even had the plan to buy the dips as the inevitable profit taking kicked in. But very soon into the results Leave started to edge ahead. Having followed many political campaigns in America, I instantly grew weary of my opinion. I knew from watching so many results trickle in over the years, once one side gets the lead -- especially one that is not supposed to be ahead -- the odds of the consensus win begin to dwindle radically. So you can hear K and I saying if London doesn’t cut the lead by X, if Birmingham doesn’t cut the lead by X -- odds are the Leave will win. Wequickly changed our view as facts challenged our assumptions. When you trade event risk it’s vital to have no ego.
3. Trade with Trend.
Once you have the right assessment it is vital to stay on the right side of the market. All of our trades were short risk and while some of the traders in the room tried to buy the turns we vehemently held them back because we knew that when it comes to event risk the trend is your friend and you fading it is a low probability choice.
4. Think fundamentally, trade technically
This perhaps was the key to our success. We had a fundamental view and traded in direction of the trend, but we almost never chased price. Instead we waited for inevitable short covering rallies and keyed off the near term resistance levels that were popping up on the charts. This was actually the best thing we did as our positions saw very little drawdown on a night when volatility was at a historic high.
Here is the video of the event. Hope you enjoy it as much as we did.