London, United Kingdom, June 23, 2016 --(PR.com
)-- For short-term investors it is tempting to trade the UK referendum. The expected volatility is appealing.
However, the volatility that some stock markets and forex markets could see over the next week could be of a different magnitude.
The opinion polls in the UK are fairly well balanced between a vote to 'Remain' or 'Leave' the European Union albeit with a bias towards Remain.
According to Adam Jepsen, the founder of FinancialSpreads
, the UK trading company, this probably makes the risk-reward ratio of trading the UK referendum skewed against investors.
"The result of the UK referendum is far from clear. Even if an investor correctly predicts the result they then, as usual, have to predict the market reaction.
"Theoretically, a win for the Remain campaign would boost the FTSE 100 and sterling.
"Of course, the theory quickly breaks down if the market has partially priced in that result."
The referendum could result in Europe's second biggest economy leaving the European Union. According to Adam Jepsen, this is likely to result in high levels of volatility that could catch investors out.
"There seem to be a lot of market commentators saying that this is a great trading opportunity but the wild swings could be too much for many pockets.
"Even if an investor correctly predicts the result of the referendum, and the broader market reaction, there will probably be a lot of volatility.
"The markets could easily spike against your trade and close your position before you can make a profit.
"Of course, with such a momentous event, extreme volatility is a distinct possibility. If a market moves against you it could gap to a completely different price level.
"That could wipe out all the funds in your trading account. Worse-still is a disastrous but plausible price move that leaves you in debt."
In 1992 George Soros, the legendary investor, placed a $10bn trade on the UK pound that made him $1bn in little under a month.
"The problem now is that a George Soros sized trade could be common place. Also, in the options markets it's realistic to assume there are some very big positions that could be triggered and send markets spiking," added Jepsen who suggests that the simple solution is avoid trading.
"Forget trading the referendum, the risk-reward ratio is probably not in your favour.
"Watch Euro 2016, take up a hobby, take care of that errand you've been putting off for two months or finish the DIY you've been putting off for two years. There will be plenty of trading opportunities once the result is known and the markets have had a little time to calm down."
Spread trading, CFDs and margined forex trading are leveraged products which carry a high level of risk to your capital. You can lose more than your initial deposit so you should ensure spread trading, CFDs and margined forex meet your investment objectives and, if necessary, seek independent advice.
About Financial Spreads
Investors can trade more than 1,000 financial markets via the FinancialSpreads.com website and mobile apps.
Clients can access a broad range of forex, stock indices and commodities markets as well as individual shares listed in the UK, US and Europe.
An array of markets, including forex and commodities are available to trade 24 hours a day from Sunday evening through to Friday evening.
Financial Spreads is a trading name of Clear Investor Ltd. which is an appointed representative of FINSA Europe Ltd., company no: 07073413. FINSA Europe Ltd. is authorised and regulated by the Financial Conduct Authority, registered number 525164.
Registered Address: Office 701, Tower Bridge Business Centre, 46-48 East Smithfield, London E1W 1AW, UK.