Markets are entering an extended holiday trading period, during which assets tend to behave differently than during the rest of the year. There are multiple reasons for this, which can help people better understand the market’s dynamics for people intending to trade during the period. The usual strategies may struggle to maintain performance amid low liquidity, and several major markets closed for the holidays.
One factor influencing the holiday period is that many traders opt to stay out of the market due to its unusual behavior. This means that the more cautious traders are absent, reducing volume and increasing potential volatility in otherwise steady currency pairs.
Dealing With “Volatility”
Although many analysts describe holidays as having more “volatility”, this doesn’t necessarily explain the market’s behavior. Generally, traders understand volatility as larger market swings, which can occur during the holiday trading period. But more than size, it’s the unexpected, often “irrational” moves in the market that can surprise traders.
This is typical of low-liquidity environments, where a single large trade can move the market. One of the main selling points of trading forex is precisely the large size of the market with high liquidity, which means more steady price action. But during the Christmas-to-New Year period, liquidity can fall enough in major pairs that you see “erratic” moves in the market, which necessitates a closer scrutiny of stop losses and higher relative risk.
Timing the Market During the Holidays
Another selling point of forex is that it is a “24-hour” market. The market is open the whole trading day, and only closes on weekends. But during the holiday season, many major markets take time off, which means trading can pause at unusual times. Therefore, trading during the holiday period means monitoring market hours to avoid having a trade remain open longer than anticipated.
Most European markets are closed on Christmas Eve, which substantially reduces trading volume. The UK is open only long enough for New York to come online, but the US exchange closes early. This leaves a trading gap before Japan opens on Christmas Day. Then, markets are closed again before opening late on December 26 for Boxing Day. With Europe closed for the holiday, there is around a four-hour gap before US markets open for regular trading hours.
Figuring Out When To Trade
Similarly, markets remain open through the 31st because London is open for a half-day. However, all markets are closed worldwide on the 1st, with trading resuming on the 2nd. Although markets will remain open in most of Europe and many Asian countries will be away on holiday, meaning trading will be particularly sparse. Regular trading hours and activity won’t resume until January 5th.
This doesn’t mean traders should stay away from the markets; in fact, some traders use the extra time around the holidays to trade. However, it is prudent to take into account the unusual nature of holiday trading, and develop strategies to match. Although markets tend to be more optimistic during the period (see Santa Rally), there is increased risk during the period ,given lower liquidity and trading volumes.
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