“Sell in May and Go Away” has been a trading strategy followed by many for years now. What has commonly been observed is that the months of July and August tend to be slow for not just the forex markets, but stocks as well. Even commodities see some seasonality. The most obvious reason for this slowdown is that summer is the time when a majority of people go on vacation. And, even if you don’t go on holiday, you can almost hear the beaches beckoning and the barbecue just waiting for a celebration of the weather, which doesn’t exactly put you in the mood for trading.
It isn’t just individual traders vacationing that causes this lull in the financial markets. Large institutional investors and professionals who place orders for hedge funds, banks, and other financial organizations also take a break at this time. This leads to low liquidity and low volume conditions, which is not the best scenario for trading.
Market Characteristics During the Summer Doldrums
With low volatility and low volumes, the markets tend to behave more unpredictably than usual and you are likely to see shorter duration trends during the summer months that are not as strong as the rest of the year. The problem is that in such market conditions, charts tend to give false signals. For instance, if you’ve been using Elliot Waves or Fibonacci Retracement Levels, you might notice that these are much less reliable during the summer slowdown.
On the other hand, news events could lead to wider fluctuations than the development actually justifies. In fact, small trades could lead to some big price moves. One of the pitfalls of the market at this time is that it tends to give false breakouts.
The slowdown also impacts trader psychology. The summer conditions require immense patience and discipline if you do decide to continue trading. There are times when traders are tempted to take aggressive positions at this time, either to relieve boredom or to counter earlier losses.
While summer might be a good time for you to take a break too, if you do wish to continue trading, there is no reason why you shouldn’t. All you need to do is revise your trading style to match the market conditions. The fact is that the summer doldrums aren’t as bad as they used to be even a decade ago. With increasing globalization, seasonality is much less dramatic than it used to be. So, summer could be a good time to gain exposure to currency pairs from the other side of the globe.
How to Trade the Doldrums
A slowdown doesn’t mean that you can’t trade at all. Here’s a look at some changes that could help:
· Coping with low volatility: Low trade volumes mean low volatility. While this might not be the ideal conditions for all types of traders, it does offer opportunities if you keep your position sizes small and alter your trading strategies. This is a time when you should pay close attention to the economic calendar since small events cause large moves at this time. Keep profit targets small at this time.
· Trading a low volume environment: Low volumes lead to huge price fluctuations for the smallest reasons. So, while moves are exaggerated, risk also rises. Just like coping with low volatility, low volumes also require greater attention to key economic events, such as the NFP and other job reports, any monetary policy changes, etc.
The summer need not be time wasted as long as you are aware of the changed market conditions and alter your trading accordingly. Spend more time reading and researching before placing trades to avoid falling prey to false breakouts and unreliable charts. And, while it is summer in the northern hemisphere, the southern hemisphere is witnessing winter, so consider Australian and New Zealand-based assets at this time.