Holiday Trading 101: Limited Liquidity Is The Rule
It’s the holidays and the markets are alive and well. Last week brought an abundance of volatility to traders, featuring huge daily ranges in commodities, stocks, and currencies. Given the amount of activity, one has to wonder if we are in for more of the same in the coming week. Are the markets set up to close 2018 with a bang?
In short, anything is possible. Most years bring modest trading conditions from the second week of December through New Years’ Day. However, this year is a bit different, featuring a pending U.S. government shutdown, lagging equities markets, and a Congressional political divide brewing for early January. As the old saying goes, “money never sleeps.” This year, money may be spending the holidays in front of a trading screen.
Holiday Trading 101: Always Have An Eye On Liquidity
Monday, 24 December, will likely be a muted day on the markets. While the forex will remain open for business, we are looking at an early closure on the futures markets and New York Stock Exchange (1:00 PM EST).
Rest assured that the black boxes will certainly be conducting business on Monday. However, most liquidity providers will be taking leave in observation of the Christmas holiday. If you are going to trade, here are a few things to watch out for:
- Thin Markets: With many traders taking time off, markets will lack their normal depth. Be on the lookout for limited liquidity and wider-than-normal bid/ask forex spreads.
- Order Flow Spikes: When participation is reduced, directional moves in price can come out of the woodwork. It is imperative to use stop-loss orders to limit risk in times of low liquidity.
- News: The news never takes a day off and holidays can be pivotal geopolitical and social times. In the event a breaking news item hits the wires during a market closure, huge GAPs in pricing may occur on the subsequent market open.
While it is true that the work of an active trader is never done, the holidays are a fantastic time to get some much-needed rest and limit risk exposure. Thin markets, inconsistent order flow, and breaking news items are X-factors best avoided.
Sometimes the best course of action is to do nothing at all. That being said, enjoy the holiday season and prepare for what will be an exciting and opportune 2019.