Five Facts for UK Traders to Consider [+Quiz]

Education /
02 Oct 2019

With the UK in political disarray and this impacting the country’s economy as a whole, there are an increasing number of opinions suggesting that UK equities and Sterling are now simply too difficult to trade. But when you’re looking to trade on fundamental analysis, there’s a lot to be said for having a sound understanding of the components which are likely to deliver the price action which suits your trading style. We take a look at how the market has changed, what to be mindful of and where the trading opportunities may lie right now.

1. What to trade beyond the FTSE and GBP?

Common sense dictates that the closer you are to a subject, the higher quality of information you will be able to access. Historically, Sterling was a comparatively stable currency whilst the FTSE-100’s broad representation of companies operating worldwide provided a barometer of the global economy. Now the Pound reacts – seemingly always badly – to any news of Brexit developments, whilst the FTSE-100 is in turn all too often buoyed simply by the foreign currency effect, given less than 30% of constituents’ income is now generated in Sterling.

         Alternatively…

The DXY Dollar index could be seen as providing a suitable broad-based currency trade alternative, with the contract likely to react reliably to news emerging from the US. Whether that’s the latest interest rate sentiment from the Federal Reserve or a Trump Tweet, the drivers are likely to be easy to discover and quick to be priced in.

Those swing traders seeking an equity replacement for the FTSE-100, which has historically seen comparatively low levels of volatility, may want to look at something like the S&P 500. 

Source: The Volatility Laboratory of the NYU Stern Volatility Institute (https://vlab.stern.nyu.edu)

Source: The Volatility Laboratory of the NYU Stern Volatility Institute (https://vlab.stern.nyu.edu)

Whilst not immune from exaggerated volatility spikes, the broad base of constituents typically helps minimise erratic market moves. Conversely, for intraday traders, the higher levels of volatility which have been displayed by the FTSE-100 may of course mean that the ‘home’ index is worth reconsidering.  

Key takeaway: Market behaviour especially on core UK assets has fundamentally changed in recent years. With a potentially messy no-deal Brexit looming, and/or another general election, there is no reason to believe that a return to normal trading conditions will be seen any time soon.

2. Trading US rate decisions

Short term fundamental traders, especially those with a day-job, may be wise to focus on trading events which happen at a time they can give the market their undivided attention. The US interest rate decision is a classic example of this for those based in the UK, given that the statement is made at 2pm Eastern Standard Time (usually 7pm in the UK).

Care needs to be taken when trading events such as this to guard against the classic overreaction and mean reversion which is often seen. In short, this means ensuring there’s sufficient margin available to guard against a spike against the open position, whilst also being mindful of the need to adjust any stop or limit orders, even if that’s only in the short term, to try and guard against any unwanted trading outcomes.

Longer term swing traders may in turn want to close out market positions during these periods of anticipated volatility.

Key takeaway: Consider trading those events which will occur at market times that suit your trading requirements. Although the choice may be limited, you’re certainly not constrained to just looking at the earliest data releases coming out of Australia and New Zealand.

3. Trading US indices

Again, UK based traders can take advantage of the time zone difference with the US to trade Wall Street. With only 30 constituents and an index which is calculated using an atypical price-weighted method, some individual stocks can have a remarkable influence on the price.

The “US30” contract is traded continuously from 6pm on a Sunday to 5pm on a Friday EST, so typically 11pm Sunday to 10pm Friday UK time. There are brief suspensions each evening following the close of the underlying market, but any corporate information released after the bell will be priced into the futures market. Those traders based in the UK have the ability to work on the late news releases from across the Atlantic - and their consequent price action – before retiring for the night.

Key takeaway: Understanding the make-up of less diversified indices and reading across to the related corporate earnings announcements could provide an alternative route for those seeking to trade short term volatility outside of what could be considered traditional market hours.

4. Be aware of unexpected volatility

This is a situation which has been seen repeatedly on GBP crosses, often occurring late in the evening as US markets wind down and before the Asian session is truly underway. Thin trading conditions at a time when late night political meetings in either Westminster or Brussels are breaking up can significantly exacerbate volatility. Prices are liable to whipsaw, and markets may well post significant gaps as a result.

Again, this is one where the swing trader needs to be acutely aware of the risk and if leaving GBP – or indeed FTSE-100 - positions open overnight may want to adjust risk profiles accordingly. Conversely, for those on a quest for volatility, late evening UK time could provide plenty of opportunity here, without having to look beyond the idea of trading Sterling.

One recent example of this was seen late in the evening (UK time) on August 15th when GBP/USD slumped 30 points in a matter of minutes. Whilst this alone isn’t a big swing, it does highlight the risks when currencies are thinly traded. 

Source: AxiTrader MT4 Account 

Key takeaway: The scale of late-night volatility on Sterling has become both increasingly frequent and eye-catching at the same time. For swing traders especially, simple risk management principles shouldn’t be forgotten, especially with the political outlook being so fragile.

5. Remember, markets don’t like uncertainty

It may be an oft-repeated mantra, but there’s no escaping that markets don’t like uncertainty. What that means is that asset valuations can end up being depressed simply because there’s insufficient clarity over future direction. Will the UK actually leave the EU at the end of October? Can Boris Johnson force through a no-deal exit? Will the Prime Minister lose a vote of no confidence? Is another General Election coming? Could Jeremy Corbyn end up with the keys to 10 Downing Street before Christmas? Will the global economy come to a grinding halt? Plenty of questions there, but at least some answers should be found in the months that lie ahead as the political process grinds on.

The Pound has been hit hard in the last few years, as the chart below illustrates. Once the uncertainty begins to dissipate, there may well be scope for a break higher simply because investors will feel better placed to prescribe a value to the currency beyond the current ‘worst case scenario’ assumptions. 

Source: AxiTrader MT4 Account

Conclusion

The trading environment certainly hasn’t got any easier for those based in the UK in recent months, but with a degree of consideration, opportunities are still there. The outlook may be clouded by such a weight of uncertainty right now but look at alternative asset classes and remember that as the end of 2019 approaches, at least some of the big questions which have been hindering market process should eventually be answered.

 

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