Holiday Trading Strategies
Trading volume around market holidays tends to be low and uneventful in the stock market. All traders to a different approach to the holidays. Some traders tend to catch up on training, observe the markets, or work on trading plans to help them spring forward in the market.
Other traders spend time with their families and forget trading exists. However, you decide to spend the holidays is ultimately your choice. Remember, it’s good to take a break even from something you love. Time off from trading allows you to recalibrate your techniques and return energized to handle the chop.
Holidays Make Mild Markets
Trading around holidays can mean the market has a completely different vibe than most other days. It’s important for traders to remember that there are a few holidays sprinkled throughout the year that are impactful to understand. These holidays affect the trading calendar and it’s important to discuss how they impact the broader market and your trading strategies for entries and exits.
A few of the actions that traders should consider might happen as we approach or go past the Memorial Day holiday are:
- Trading volume tends to dry up and the market lacks liquidity
- We may see little to no price action
- Should anticipate erratic price movement that makes no sense
- Low volume means you may have difficulty exiting a trade
Traders at Simpler Trading consider and prepare for the market response to bigger holidays, such as Christmas or Thanksgiving. It’s important to note that during these holidays there is an entire season where people are starting to leave for vacation or are traveling to be with family.
Traders and investors are generally uninterested in the markets when they are away from their computers or their desks. The active traders essentially tone down their game a little bit. After all, when it’s a holiday, people want to be with family and do other things.
Video Guide to Holiday Trading
Volume Dries Up, Trades Flounder
We know that trading volume tends to dry up, which means there is a lack of liquidity in the market. It’s essential to understand why this happens for a few reasons. When traders come into the market the day before Christmas or the days between Christmas and New Year, they may be ready and excited to trade. However, they may notice there isn’t much activity in the market.
When the stock price isn’t moving, the reason can simply be that many people aren’t at their computers pushing buttons and affecting price action. The impact of that on your trades is something to consider.
If traders are making sizable trades or even trading options, they should be aware that there may not be a lot of liquidity to get into a trade or to get out. Getting in and out can be difficult without a large spread or a larger gap between the buy-sell and the bid-ask price. Traders will find it’s the same with options trading. Without much trading activity in the market, traders have a big effect as they execute or get out of a trade.
Trade strategies are difficult in a market with little-to-no price action because there aren’t many people trading. It takes a group of people to push the price because the bid-ask price is so broad. A large amount of money can push the price since nobody else is affecting it.
The market can resemble a leaf in the wind that could get pushed around very easily. Without many other traders in the market pushing and causing the price action to move around, it tends to be either erratic or flat.
Notable Trading Calendar Events
Low volume or liquidity is something traders also tend to see leading up to the Federal Open Market Committee (FOMC) announcements. When the Fed talks about raising interest rates, traders see the market go quiet – at least a couple of hours ahead of it and usually for the day of the FOMC meeting. Traders need to know ahead of time and prepare when the market holidays and announcements by the Central Bank are on the calendar.
What is a Half-day in the Market?
Traders should know what a half-day means for their trades. Essentially it means the market is open for half the day. If the trader isn’t careful, their trade could get trapped with an early market close for an official holiday.
How Holidays Affect the Bonds Market
The bond market holidays affect the stock market. Other holidays for other countries can affect their U.S. markets, too. Traders would do well to know the special holidays, dates, and market open and close times.
Options Over the Holidays
Finally, whether options traders are buying or selling, they should understand the Black Shoals mathematical equation and theta burn. They should know how to apply the Greeks, and theta decay, when it comes to trading options over the holidays.
There are a few common sayings that traders refer to regarding the market seasons. “Sell in May, go away” can be a relatable phrase for traders. More often than not, at some point in May, there is a period that the market usually sells off pretty hard. This almost signals the beginning of summer for the market. Many traders, market leaders, and hedge funds are going out to their “Hamptons.” The kids are out of school, nice weather, and the beach is calling. They are not around the market to make an impact.
Traders can anticipate a market quite as far as movement during the summer. That can make for some erratic price functioning. This doesn’t mean that retail traders leave the market. It means traders need to be careful because fewer people are trading and moving the market during the summer.
However, gearing towards the end of the year, traders encounter the Santa Rally. The Santa rally occurs at the end of the year leading up to the New Year. There is usually a run where the market sees a move upward. There is no guarantee of this, as traders saw no Santa Rally in the winter of 2018 when the Federal Reserve was tightening up rates. That year the Santa Claus Rally didn’t happen until the following year when the Fed reversed its interest rate hikes.
Going into Christmas, people want to make their numbers look good. The overall mood is that people are usually happy, uplifted, and want to have a good time going into the holidays. They typically don’t want to see their account smashed as they celebrate the holiday cheer. There also tends to be a bullish run before the Fourth of July. This historically pro-America sentiment affects the stock market too.
After Christmas and going into the new year, historically, leading up to and into the Fourth of July. The market tends to be bullish. Traders would do well to know there is some seasonality to some of these holidays – so pay attention to that and see how you can take advantage of it.