Should You Trade During The December Holidays?
It’s an important question during this time of the year – and this video shows you why…
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We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
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We have a great question today from Pierre in the analyst chat, asking whether it’s a good idea to trade during the December holidays or whether it’s better to just stay out of the market during that time, and it’s quite an important and frequent question during this time of the year so I thought doing a quick video on it will be important.
So, what is the big deal about December anyway? Well, it all comes down to liquidity and volume. It’s not just other professions that take time off during the festive holidays, right? Majority of trading desks and firms close up shop as well, and many asset managers and firms will use that time as an opportunity to close out some of their book for the year.
Also keep in mind that compensation in the form of trading bonuses isn’t calculated based on December performance, it’s calculated before that so there is also much less incentive for trader in that part of the market to try and chase their PNL.
Also keep in mind that the number of economic events is also limited. There are very few central bank meetings as we head deeper into December, and for many desks the last main event of the year is usually seen as the December FOMC meeting which takes place next week.
So, why is this important? Like I said it’s all about liquidity, which is much thinner during December. Think about what thinner liquidity means. It means less market participants. That means less participants at either end of the trade. So, without any meaningful participation taking the opposite end of the market you can often see very random and jolty volatile moves.
Now I know this is going to be a very silly analogy when I thought about explaining liquidity for the video I immediately through of this so just bear with me. So, here goes, think of liquidity like a game of brick breaker, I’m sure most people watching this will remember brick breaker, so think of liquidity during regular times of the year as this example on the screen where the ball has plenty of bricks to ram up against sending the ball back, think of that as the number of active participants that are there to absorb moves in the market and trade in the other direction, which creates more favourable volatility.
Now compare that with this example, when there are fewer blocks much further apart, just like we have less active market players during December, it often means that price needs to travel a lot further to find enough counter orders to push back, which is why December can often times be a time of very big price swings.
So, because the price can either trade absolutely nowhere and very muted due to the lower volumes, the price can also spike violently in either direction, and it means that you need to account for that possible volatility by widening your stops, which could be a real headache if you underestimate the possible volatility.
A good thing to keep on the radar if you are attempting to trade during these types of environment is tracking the volume for various parts of the day to make sure you are picking the times best suited for trading. For those of you who have access to Xenith, you can access their FX Volume Heatmap, which shows you where the highest volume is traded for particular pairs, and what you’ll notice as you head into December the activity will dry up and means you can use a tool like this to choose your trading times a bit better. Obviously unscheduled news is exactly that, unscheduled so you also need a bit of luck by hoping that big news crosses the wires during that more liquid times during the day.
The other thing to keep in mind during these times is trading costs. Remember, that the more liquid a market is the better your trading costs will be in terms of spreads etc. So, sometimes, during those periods, the amount of price movement you need just to see breakeven on a trade can be quite something and increases your risks from the get-go.
Also keep in mind that if you are a trader that likes to trade various asset classes like we do, the majority of markets close down during the big holidays in December, which means that there might not be any market for you to even trade on some of those days.
So, all in all, I’m not saying trading in December is impossible, but rather that the associated risks versus your reward means that it’s often best just to stay out of the market during those times, and is why our analyst desk also closes for a period during the festive season.
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If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://financialsource.co
-----
We have a great question today from Pierre in the analyst chat, asking whether it’s a good idea to trade during the December holidays or whether it’s better to just stay out of the market during that time, and it’s quite an important and frequent question during this time of the year so I thought doing a quick video on it will be important.
So, what is the big deal about December anyway? Well, it all comes down to liquidity and volume. It’s not just other professions that take time off during the festive holidays, right? Majority of trading desks and firms close up shop as well, and many asset managers and firms will use that time as an opportunity to close out some of their book for the year.
Also keep in mind that compensation in the form of trading bonuses isn’t calculated based on December performance, it’s calculated before that so there is also much less incentive for trader in that part of the market to try and chase their PNL.
Also keep in mind that the number of economic events is also limited. There are very few central bank meetings as we head deeper into December, and for many desks the last main event of the year is usually seen as the December FOMC meeting which takes place next week.
So, why is this important? Like I said it’s all about liquidity, which is much thinner during December. Think about what thinner liquidity means. It means less market participants. That means less participants at either end of the trade. So, without any meaningful participation taking the opposite end of the market you can often see very random and jolty volatile moves.
Now I know this is going to be a very silly analogy when I thought about explaining liquidity for the video I immediately through of this so just bear with me. So, here goes, think of liquidity like a game of brick breaker, I’m sure most people watching this will remember brick breaker, so think of liquidity during regular times of the year as this example on the screen where the ball has plenty of bricks to ram up against sending the ball back, think of that as the number of active participants that are there to absorb moves in the market and trade in the other direction, which creates more favourable volatility.
Now compare that with this example, when there are fewer blocks much further apart, just like we have less active market players during December, it often means that price needs to travel a lot further to find enough counter orders to push back, which is why December can often times be a time of very big price swings.
So, because the price can either trade absolutely nowhere and very muted due to the lower volumes, the price can also spike violently in either direction, and it means that you need to account for that possible volatility by widening your stops, which could be a real headache if you underestimate the possible volatility.
A good thing to keep on the radar if you are attempting to trade during these types of environment is tracking the volume for various parts of the day to make sure you are picking the times best suited for trading. For those of you who have access to Xenith, you can access their FX Volume Heatmap, which shows you where the highest volume is traded for particular pairs, and what you’ll notice as you head into December the activity will dry up and means you can use a tool like this to choose your trading times a bit better. Obviously unscheduled news is exactly that, unscheduled so you also need a bit of luck by hoping that big news crosses the wires during that more liquid times during the day.
The other thing to keep in mind during these times is trading costs. Remember, that the more liquid a market is the better your trading costs will be in terms of spreads etc. So, sometimes, during those periods, the amount of price movement you need just to see breakeven on a trade can be quite something and increases your risks from the get-go.
Also keep in mind that if you are a trader that likes to trade various asset classes like we do, the majority of markets close down during the big holidays in December, which means that there might not be any market for you to even trade on some of those days.
So, all in all, I’m not saying trading in December is impossible, but rather that the associated risks versus your reward means that it’s often best just to stay out of the market during those times, and is why our analyst desk also closes for a period during the festive season.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
