Thursday 18th September, residents of Scotland voted on a binding referendum which includes the option of becoming an independent country by leaving the United Kingdom. The United Kingdom has existed for 307 years, and although most of Ireland left about a century ago, has suffered no disruptions or invasions of its territory.

The United Kingdom used to be the most powerful country in the world both economically and militarily, building and maintaining the largest empire the world has ever seen in human history. Although it its primary superpower status to the United States about a century ago, it maintains a strong economy, a permanent seat on the United Nations Security Council, one of the major global financial centres (London), one of the world's major currencies (the GBP), and a nuclear capability. It is one of the largest and wealthiest members of the European Union. It is generally regarded as perhaps the 5th or 6th most influential country in the world today.

The result of the referendum will almost certainly have an enormous effect on the GBP in the Forex markets. Therefore a trading opportunity will probably arise, but the opportunity is likely to be accompanied by the danger of extreme volatility, so trades must be placed very cautiously. I already wrote a technical analysis Thursday morning covering the GBP/USD pair which dealt with this referendum, and more background can be found on our news item of the day, but this article is a definitive guide.

Effect of the Vote

An opportunity to profit exists because the impact of the result on the GBP is clear:

A YES vote FOR independence, will cause the value of the GBP to FALL dramatically.

A NO vote AGAINST independence, will cause the value of the GBP to RISE, but probably not as dramatically as a YES vote would make it fall.

This is because the market is expecting a NO vote, and this has ensured that the GBP has been rising against every other currency for a few days now, partially “pricing in” a NO result. Significantly, the GBP has also been rising strongly during the day Thursday, while voting is going on. GBP/JPY has been making new 6 year highs for some days, so the wind of the long-term trend is at the back of the long direction.

Scottish Referendum Trading Strategy

When a NO vote looks likely, SELL/SHORT GBP/USD and GBP/CAD. The USD and CAD should be chosen as they are the strongest of the major global currencies at the moment.

As volatility will probably be very strong and the price may also be swinging wildly, the execution of any market order at the moment you most want it might be impossible. Your broker may be unable to open the trade. You could place entry orders, take profit and stop loss orders in advance, but you still might be massively slipped, and be stopped out unnecessarily.

The best strategy in these situations is to wait for an announcement of partial or full results that makes you convinced the result is going to go one way or the other, and then try to enter at market as soon as you possibly can after that. This is likely to be after the first pull back, and the price should travel a long way in your desired direction. Do not letthis worry you.

Your position size should be extremely small, as any surprises might cost you many hundreds of pips. Being reckless here could blow your account. Your emergency stop loss should probably be about 100 pips the other side of where the price was when the news that convinced you of the trade was released.

Trading Timetable

All times given are London times.

At around 1am, the first partial results should begin to be released.

At around 3am, there will be more significant partial results coming. The likely result is most likely to become clear between 3am and 6am and if so this should be the moment the price really starts to move.

The final, official result should be announced at some time between 6:30 and 7:30am but of course might be delayed.

Good luck, and be very careful. Trade with a very small size and be prepared for the price to move against you by several hundred pips in a worst-case scenario.