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British Pound About to Get Pounded?

Brexit may finally arrive; how will the currency market react?
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In 2016, the polls were wildly incorrect. No, I'm not talking about the U.S. Presidential Election. I'm talking about Britain's exit from the European Union, also known as Brexit.

In June of 2016, most polls showed the Remain camp in the mid-50% percent range. remain had a clear lead on the Leave contingent, which was mired in the mid-40's. 

Clearly, that lead wasn't insurmountable. When it became apparent Team Leave had won, the pound dropped by more than 15 cents, or 1500 pips, over the next 24 hours. 

Since then, a series of lengthy negotiations have accomplished little, other than the delay of Britain's exit from the EU. On Friday, U.K. Prime Minister Boris Johnson threatened to walk away without a trade deal, a move that could have a dramatic impact on the British pound. 

GBPUSD chart via TradeStation

GBPUSD chart via TradeStation

How should traders look to play this move in the pound? No one has ever lived through an actual "Brexit" before, so no precedent has been established as to how markets may react. From a trading perspective, that could be a good thing. 

One British pound currently traders near 1.29 U.S. dollars. On the above chart, I've created a setup designed to take advantage of a major plunge, should it occur. My entry point is green, and my stop is red. 

To hedge my bet, the pound's pathway is lined with four partial exit points, in blue. Every time an exit is hit, the stop is to be lowered. 

A so-called "hard Brexit" would lead to volatile markets, and only add to the chaos that has been 2020. While 2020 has been a downer in many ways, traders who flourish in volatile markets haven't been disappointed. 

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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here