Some levels to watch. Some risks you face

Prime Minister May's plan for Brexit will go to a vote with the expectation for a rejection. Then it gets interesting on whether there is a modified deal, or is there a general election, or a different deal, or 2nd referendum or no deal. Who knows?

There are also guesstimates on what the GBPUSD will do.

Remember as well, the BOE could potentially be on the sidelines monitoring for orderly markets. Unlike the flash crash of a week or so ago, this will not be a surprise.

The uncertainty, delays, headlines, etc. will lead to all sorts of volatility.

As a result, risk will be sky high at the time with expectations for multiple big figure moves.

For you out there, the most important thing is understanding the difference between trading and gambling.

Trading is about understanding and controling risk (win or lose). Gambling is about having the attitude that "win or lose, have a booze" and focusing mostly on reward (you become blind to risk).

I focus on risk and at times risk is outside my acceptable boundaries. At the vote time, this will be one of those instances.

I don't have a crystal ball as to what scenario may play out. How will the headlines come out? What will be the reaction by May/lawmakers? What is already priced in? I also don't know the liquidity conditions at my broker (how wide are the spreads, can I get in or out?).

There are three types of risk when trading:

  1. Market risk. This is the risk we face when the markets are open. The price can go up and down on normal buy and sell flows.
  2. Event risk. Can be a known economic event like CPI, employment, or GDP or a random one like what we will experience later today. The ones like the vote will spawn events that have no time limit attached. That increases risk/volatility potential.
  3. Liquidity risk. What will our broker allow us to do and at what cost. The liquidity during the flash crash was limited.

Needless to say, each of these risk will be sky high as the vote progresses.

"Traders" like to have some control over the 3 risks. When they don't, "not trading" becomes an real option. Those who don't trade tend to have a mantra that humbly says, "There will always be another trade, when the three risks are lower and more predictable."

"Gamblers" who tend not to care about risk and focus more on hitting the home run, will igore the risks. If they win, you can be sure we will hear about it on message boards (good for them. I am always happy when anyone wins).

If they lose - and they can be right with their "view", but still get whipped around because of their broker, market volatility, a counter event (i.e. BOE) - we won't a peep from them. Some will become just another trader that blew up an account.

You need to decide for yourself your risk tolerance and preference.

Can you control your risk?

Now one way to control risk is by applying tools to the price action. Depending on how the price reacts relative to the tools, gives a bias - bullish or bearish. That bias can also define risk. The levels become stops.

So if the bias is bullish because the price moved above a trend line or MA, that Trend line or MA also is a risk defining level (a stop).

The deal is, you have to be disciplined. Define and limit your risk, and use them to stop you out if the "market" has other ideas. Remember, there will be multiple events that could swing prices back and forth (and change the bias too).

Looking at the daily chart of the GBPUSD (see chart above), the price has been trending lower since April partly in anticipation of Brexit issues (it is not a secret that there is division to different plans).

Putting it another way, there has not been a lot of time when the GBPUSD trades at 1.2800 going back in time. Does that mean a bearish scenario is priced in? I don't know, but be aware.

What key techncial levels are in play? What would turn the bias more bullish or bearish from the current level? Note some of these levels may be blown through on the result, but they still define a bias.

BULLISH:

  • 1.2892. The price over the last two days has traded above the 100 day MA (blue line in the chart above). That MA comes in at 1.28921. A move above that level is more bullish
  • Trend line. Above that level, a trend line cuts across at 1.3047. A move above it would be more bullish.
  • 1.31184. The 200 day MA (green line) comes in at 1.31184. The price since May 15, 2018, has not had a day above the 200 day MA. In November the price moved above that level (Nov 7 and Nov 8th). It's doable
  • 1.3156. This level is the 100 week MA. A move above would be more bullish
  • 1.31877. The 38.2% of the move down from the 2018 high comes in at 1.31877.

Above those levels and the October and September highs at 1.3257 and 1.3297 (call it 1.3300) are the next targets, followed by the 50% of the move down at 1.34146.

The bullish case probably has the most room to run given the already low historical levels (but who knows and that is for a "market" expectation reason).

BEARISH:

On the downside, my levels of importance are the following:

  • 1.27609 (the price is already moving toward this level today). This is the 200 hour MA (see hourly chart below). The price tested that MA on Friday and bounced. The last close below was back on January 4th. A move below is more bearish.
  • 1.2706-16. Lows from Jan 8, 9, and 11th
  • 1.2662-95. The swing low in October was at 1.2695. The swing lows in August 2018 and early December 2018 was at the 1.2662 area. A move below that area would be more bearish.
  • 1.2613-17. Swing lows from January 4th (see hourly chart)
  • 1.2475. Swing low from December 2018
  • 1.2453. January 2018 low.

Below that level will look toward the 2017 swing lows at 1.2360 (April 2, 2017), 1.21085 (March 12, 2017), 1.1986 (low for 2017).

SUMMARY:

Know your risk and you need to decide for yourself if the market, event, liquidity risk is good for you given your position. Understand that no one really does not know how the cards will fall. There will be multiple eventst that could rock the boat.

If you do trade, understand the important technical levels that define bias. They also define risk. I hope this post helps wiith that and you are disciplined . It is ok to take profit (or partial profit).

You always have the option to trade only when risk is in your acceptable range. The reward from the "gamble" might not be as great, but you are assured to be around tomorrow to trade another day.