Well, we’re only a few days away from the big day, and I’m really looking forward to taking a well earned break away from my desk to enjoy some much welcome and needed down time with family and friends.
This Christmas period for me is all about family, friends, eating and of course a couple glasses (OK bottles) of my favourite Argentinian Malbec.
The present wrapping and food shopping is all but done (I know-impressive you have to say), so the countdown to Christmas morning for the Jones household has truly begun
Christmas morning proceedings are likely to kick off with a 5 am early morning call from a ridiculously excited 8 year old son…but hey that’s what Christmas is all it’s all about and to be honest it’s something I simply can’t wait for.
So far the next week or so, I’ll be turning off my PC, kicking back and enjoying the festivities
However, I appreciate there will be some traders out there (and maybe you included) who will have difficulty switching their minds off the markets or passing up the chance of grabbing some profits before 2022 comes to a close.
If so then you must be aware…
Trading the Christmas Period Is Different.
Firstly to clarify, when I refer to the Christmas period I’m basically talking about the week leading up and the week after and precedes the New Year.
During this period the trading environment and its conditions change quite a lot for one simple reason.
The big players, the guys who move the markets such as the institutions, hedge funds and the banks are not at their desks and have taken extended leave to spend with their families whether they celebrate Christmas or not..
So what does this actually mean and things you must consider when it comes to Christmas trading?
Volatility
With little no market participation from the big boys, there’s likely to be a dramatic drop in market liquidity meaning they have a real tendency to be highly volatile.
High volatility often results in violent upward and downward swings in price, meaning your stops and profit targets are hit on very little order flow.
You see, a price on any chart basically constitutes an accumulation of all the buyers and sellers at any given time.
When volumes are light, like they are over Christmas, these erratic swings can happen a lot easier and much more frequently because there’s not enough traders to keep price flowing more steadily.
Automation Trading.
Commonly known as EAs (Expert Advisors) if you’re using MT4 or ‘blackbox trading’, if you’re using automation trading programmes over this period then there’s something very important you need to be aware of.
These programmes are made up of algorithmic values based on previous price action.
However when they are developed, tested and coded they do not factor in low volume/high volatility periods like Christmas but instead rely on a broad set of data.
This means that in general (but not in every case) they are not designed for these types of market conditions.
If so then it may be wise to switch off your automation during the Christmas period.
Beware of the Spread
The spread is the difference between the Forex Broker’s bid (sell) price and the ask (buy) price of a currency pair.
During periods of low liquidity, brokers have a tendency to widen spreads.
You see this very often during the asian session when markets are often quiet.
The negative effects of wider spreads is two-fold:
- The cost of placing a trader is going to be higher
- The increased chance of getting stopped out due to the spread moving outside of your stop price resulting in your broker closing your trade.
Lean Towards the Majors
Sticking with spreads, it’s very important to be aware that when you trade forex, different currencies have different liquidity.
For example, the US Dollar is the most actively traded currency in the world, accounting for almost 88% share of daily turnover. This is followed by the Euro coming in at just over 31%, the Yen at 22%, pound sterling at 13% and Aussie Dollar and Canadian Dollar at 7% and 5% respectively.
https://www.countries-ofthe-world.com/most-traded-currencies.html
These leaders are represented in the most traded pairs in the forex,
Commonly known as the MAJORS, they consist of:
- EUR/USD
- USD/JPY
- USD/GBP
- USD/CHF
- AUS/USD
- USD/CAD
As these are the most actively traded currencies, the liquidity will be far greater meaning the spreads should be tighter.
Therefore during holiday times like Christmas you’ll be far better served sticking trading the major pairs.
Economic Releases
With the combination of low liquidity and speculative positioning from economic releases or news events can sometimes lead to sharp rallies and reversals. With that in mind, any major financial headlines or surprises over the Christmas period could provide some opportunities to catch the beginnings of some big market moves.
As with every year, reports over this year’s holiday period are still up for release, meaning price action will still be present in the Forex markets.
Here’s what’s expected:
December 26: Japanese Unemployment Rate, Japanese Retail Sales Y/Y
December 27: Japanese Housing Starts Y/Y, BOJ Summary of Opinions, Prelim Industrial Production; U.S. Goods Trade Balance, Prelim Wholesale Inventories m/m, HPI m/m, Richmond Manufacturing Index
December 28: Spanish Flash CPI y/y, Italian Monthly Unemployment Rate, U.S. Pending Home Sales m/m
December 29: UK Nationwide HPI m/m, French Consumer Spending m/m, German Unemployment Change, Private Loans, Italian Prelim CPI m/m, Italian 10 yr Bond Auction; US. Unemployment Claims, Crude Oil Inventories
December 30: Australian Private Sector Credit m/m; US Chicago PMI
Economic Releases
With the changes in volatility, it may be advisable to make some adjustments with your stop losses and profit targets.
For example you could set lower profit targets for pairs that have seen noticeable reductions in volatility over these periods and widen stops for pairs that have experienced higher volumes.
Opportunity Knocks…
As you can see, Christmas trading comes with a few potential pitfalls and considerations, however depending on what type of trader you are there are indeed some great opportunities that you can take advantage of as well.
The Breakout Trader
Break out trading is a strategy that looks to take advantage of explosive moves that break through key levels of support and resistance after it’s been trading in range.
With fewer traders taking part at these key levels of support and resistance during these market conditions, the likelihood of these levels being broken is much higher leading to impulsive, high momentum moves.
But here’s a little tip…
When you have high volatility that doesn’t necessarily mean you have a strong trend, so it’s very important you have your profit targets in place, as the market could break through your target price and retrace quickly meaning you miss out on your profits.
Scalpers
Break out trading is a strategy that looks to take advantage of explosive moves that break through key levels of support and resistance after it’s been trading in range.
With fewer traders taking part at these key levels of support and resistance during these market conditions, the likelihood of these levels being broken is much higher leading to impulsive, high momentum moves.
But here’s a little tip…
When you have high volatility that doesn’t necessarily mean you have a strong trend, so it’s very important you have your profit targets in place, as the market could break through your target price and retrace quickly meaning you miss out on your profits.
So if you are intending on grabbing some extra profits from the markets over this period, hopefully the above points have given you a heads up of the potential pitfalls, and things you need to be aware of during festive market conditions.
If you’ve decided however to take a break from actively trading, that doesn’t necessarily mean you have no time for some CPD (Continuing Professional Development.)
By all means utilise this time to relax with family and loved ones, and maybe to reflect on the year just passed, but also finding some time to study different markets and currency pairs, hone your trading skills and strategies, back test or revisit your trading plan will help ensure you stay ahead of the curve and kick-off 2023 with a massive bang.
Whatever you decide to do, I would just like to wish you a very happy and joyful Christmas.
