FTSE 100 forecast and how to trade on Brexit Day

In a typically volatile and unpredictable October, this analyst shares thoughts on trading strategy.

How to trade on Brexit Day

As the clock ticks down (or not) to Brexit, we've been considering suggestions on how to trade! The reason is fairly basic, there's a good chance of market volatility with a bunch of lazy writers quoting trite Warren Buffet sayings.

It would be nice to say we already know what’s coming, but it'd also be utter bull. 

While many respected economists are queuing up to do their "talking heads" thing to predict calamity, famine, markets crashing, lack of toilet paper, etc, it's worth remembering not a single one of them got it right with the crash which culminated in 2009, a crash we still feel the effects of.

It's possible, if these clowns are predicting chaos, we should actually anticipate the opposite, should Brexit actually happen.

One thing is certain. Even if there is no chaos, the market will invent some on Brexit day as wild swings will be the immediate fashion. Of course, the reason for wild swings is rather less glamorous than folk like to admit. A game of "trap the stop loss" and "trigger the order" will commence, effectively meaning 'stops' and orders risk proving a really bad idea.

Imagine, for instance, a trader with a cunning plan which involves Lloyds Bank (LSE:LLOY) shares. Visually, there's a heck of an argument suggesting this should go up in price, if it only betters 57p. Equally, if it drops below 48p, it's probably going down. 

On Brexit day, it would be perfectly feasible for the price to surge to 57p for a second, triggering the buy order. And at 2 seconds past 8am, it would probably fall below 48p, triggering the stop loss.

So, if the trader had allocated £10,000 to the Lloyds trade, they'd lose nearly £1,600 within the opening seconds of the market day. This is not a fairytale, it happens.

To trade safely at Brexit, if Brexit ever happens, 'stops' are liable to be the enemy and, therefore, worth either expanding to absurd levels or removing entirely. Equally, on the subject of orders, they can prove dangerous unless opting to chase the absurd. In the case of Lloyds, a buy order around 30p would make sense. RBS (LSE:RBS) on the other hand allows 142p, perhaps even 100p.

We'll cover this in greater detail as the month unravels.

FTSE for Friday

As for Friday, the FTSE 100 is making as much sense as a Labour politician when asked their policy on Europe. 

Source: Trends and Targets      Past performance is not a guide to future performance

The index closed Thursday at 7,197 points and appears to have set 7,225 points as a valid trigger level for any real rise. Above 7,225 expects a useless 7,235 points initially with secondary, if bettered, at 7,309 allegedly. Recent market behaviour has seen rises fail roughly half way to their secondary and, if this is the case again, the index will probably fizzle at 7,270 points or so.

If triggered, the tightest stop looks like 7,140 points.

The alternate position; what happens if 7,140 breaks? We calculate reversal to an initial 7,122 with secondary, if broken, at 7,091 points. We'd add, if the index starts trading below red on the chart - this year's uptrend - Boris need only announce something daft to provoke 7,027 points very fast.

Alistair Strang has led high-profile and "top secret" software projects since the late 1970s and won the original John Logie Baird Award for inventors and innovators. After the financial crash, he wanted to know "how it worked" with a view to mimicking existing trading formulas and predicting what was coming next. His results speak for themselves as he continually refines the methodology.

Alistair Strang is a freelance contributor and not a direct employee of Interactive Investor. All correspondence is with Alistair Strang, who for these purposes is deemed a third-party supplier. Buying, selling and investing in shares is not without risk. Market and company movement will affect your performance and you may get back less than you invest. Neither Alistair Strang, or interactive investor will be responsible for any losses that may be incurred as a result of following a trading idea.