Bracing for Brexit: How Nadex (and Others) Are Preparing for the Storm
Futures and forex brokers increased margin requirements (some by 200% or more) to protect, or exclude, smaller accounts from the volatility expected on June 23. Nadex, which has no leveraged accounts, expanded strikes and strike widths to offer a wider range of opportunities to big and small accounts alike. To each his own.
By Vikram Rangala
Wednesday, June 22, 2016 - 00:00
Remain or Leave is the question facing UK voters. Buy or sell is the question facing traders.
Deciding whether to be bullish or bearish on a particular market in the coming days and weeks (or minutes or hours) requires you to decide a couple of other things before you place a trade.
The first decision, of course, is which way will the UK end up voting? Will they decide to stay in the European Union or leave and become just another independent country dealing with the Europeans as an outside competitor and partner?
This isn't the place to get into all the things that membership in the EU involves. There are benefits and burdens and they are emotional. They involve central bank policy, trade barriers and tariffs, and the acceptance of migrants and refugees. Among a few thousand other things, including being able to take the Chunnel from London to Paris for dinner if you happen to get off work early. Visa, s'il vous plait?
The second decision is, how will the market react to a Remain or Leave decision? The news is dominated by speculation about the long-term effects on exchange rates, the FTSE, employment rates, and trade policy. But in the hours and days following the vote, the only thing we can reasonably expect is volatility.
Experienced traders can recall dozens of times when something happened that investors had been hoping for—a fed rate decision, for example—and the market rallied briefly and then quickly sold off. The explanation is that price movement isn't always a vote on the news of the day. It is about profit-taking and bargain hunting and getting squeezed out of positions and getting your stops hit.
The general consensus is that the investor class—the big investment banks, hedge funds, and wealthy individuals—are overwhelmingly in the Remain camp. One vocal exception is Republican presidential candidate Donald Trump, whose major investments are in real estate and whose reasons for supporting leaving the EU have to do with immigration. So the obvious conclusion is that if the UK votes to remain, the stock market will rally.
Right? Well, maybe. And maybe not right away. Some traders have short positions in stocks and British Pound futures, ostensibly as hedges against a market drop. If the buy stops on those short positions get hit, that could easily spark a rally.
However, think of the buyer's point of view, the buyer who wants to add to her long position in anticipation of a price rise. The first rule of trading is, "Buy low, sell high." So if you are looking to buy, you'll ideally wait for the market to dip and give you a bargain.
If at any point, whether for five minutes or five hours, a market has aggressive short sellers and buyers who are playing coy and holding out for lower entry prices, that market is going to see lower prices. It's easy to see how markets drop even when the overall sentiment is bullish, if you think about the moment-to-moment decisions traders are making. They aren't voting on macroeconomic phenomena. They're looking to get the best prices, take profits when they can, and not get hammered if they're wrong.
Okay, so you already knew that much: the markets, especially global stock markets, the euro, and the pound, are going to be volatile in coming days and weeks. Most likely, so will ancillary markets like gold, crude oil, and the Japanese yen. We got a preview of that in Monday's global rally after one poll showed a small shift in voter sentiment.
But you should also know that it's possible to trade these hyper-volatile markets without having to put up double the margin or take on even more risk per trade. Nadex binary options have the same limited risk of less than $100 per option. We haven't changed that at all, nor did we change our affordable minimum opening balance or our low fees.
The only change is that we offer a wider range of strike prices to choose from in those volatile markets. That allows you to have greater precision in your entry points and to trade big price moves without getting stopped out and with limited risk guaranteed.
A storm is coming, but at Nadex, we've got you a stronger, wider umbrella to stay dry under.
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