Who has not recently heard about the decision of the UK people to leave the European Union? The famous term “Brexit” (being a made-up word commingling Britain and Exit) stood for the referendum that UK Prime Minister Cameron proposed to the British to vote for either Remaining or Leaving. As close as it was, the majority voted to better leave the Union of 28 member states.
The basic question is: Did Brexit move the Pound? For sure the Brexit vote from last Thursday, June 23rd, had quite an impact on capital markets around the world. There were big headlines about the German Equity Index DAX dropping by 10% and the Dow Jones dropping by more than 800 points (around -4%). The media reported with great excitement that the Pound (or GBP) made a 30-year low against the US-dollar. Reading the news, you might have had the impression that the UK is now falling apart politically, that the country is economically finished and not going to recover again.
One of my fundamental beliefs, however, is that all market information is already included in the price of the chart and, therefore, no other sources of information are required. Actually, I do read the news but not for my trading but because I enjoy reading and observing reactions.
Looking at a monthly GBPUSD chart below, you can quickly see that the GBP has been in a bear market for about 2 years already. Since July 2014, long before the Brexit vote, the GBP has lost about 20% of its’ value (drop from 1.7190 to 1.3835). Without a doubt, Brexit added down-pressure (another -10%) but it only continued the long established trend. The June red bar is large but it is not extremely large and it is not the biggest red bar on the chart. Clearly, simply looking at the monthly chart does not reflect the shock that the media has been communicating these last few days.
Not only could this continuation of the downtrend have been foreseen, but it has been developing as it actually should. About a year ago, I wrote about the GBPUSD downtrend (see Hedging Your Unconscious All-In Currency Trade). The 2008 Global Financial Crisis had helped start a Busted Pattern on the monthly chart and my system triggered a short entry on the 4th of September 2014 once the pair crossed the red horizontal line at 1.6374. The initial stop was placed at 1.7240.
This short was supposed to be held for many months if not years as it made its way to the target of 1.2000 (respectively 1.0000 / par level). So far, the trade has made more than +3.5R and has earned a 20% gain. Not bad for a trade that is only just half way through to its final target.
As it is supposed to do, the GBPUSD Busted pattern has continued running stops and accelerating the downtrend. The pattern works well and works consistently because its edge is based on pure psychology (pain) of market participants. Traders get “double trapped” at the same time in this pattern: the longs are trapped in while the shorts are trapped out — which helps produce predictable short-term moves as well as fuels the long-term trend. This edge for my Busted Breakout System (System 1 from the Forex workshop) works as effectively with monthly bars as it does for intraday bars.
As you can see in the chart above, the stop levels (orange lines) have been fished successively in the downtrend as indicated by the 3 orange circles — which have added fuel to the downtrend each time. The last stop run, also the low of the whole pattern, just happened with the Brexit move down.
Even disregarding the Brexit vote, however, the price chart is following the pattern as expected! It is nothing special and nothing to be excited about. Had the UK voted the other way last week, the stops would have been taken out at some point for some other reason or just as a result of time passing. The GBPUSD chart looks like a rather normal Busted pattern where prices keep testing higher levels and then push lower.
Back to the initial question: Did Brexit Move the Pound? No, it did not — the Busted Pattern did — or more accurately, the psychology behind the pattern moved the Pound!
When you understand what, when and why things happen in the markets, then there is no need to get excited about news or market moves. There is also no need for your positions to ever get caught on the wrong foot. Markets follow a certain logic and the Busted Breakout is one of those pattern you should actually know how to read.