Despite Foreign exchange (forex) standing as the largest financial market in the world, boasting 24-hour access five days a week, one might expect the holiday season to be the busiest time of the year.

This just isn’t the case – liquidity actually diminishes across global markets. The primary driver behind price movement in the forex market, aside from central banks, are large commercial banks, such as JPMorgan Chase, Deutsche Bank, and Citi. Institutional traders go holiday shopping and hunt for holiday sales just as we do. The point is when these traders leave the trading desk they’re not trading, hence the drop in trading volume.

During this period, due to diminished volume, erratic price moves can occur, occasionally without macroeconomic drivers. Trading spreads can also increase, with the weeks leading up to Christmas and New Year often the slowest time of year.

For traders still wishing to participate during the holidays, here are 5 points to be aware of to keep your trading account on the straight and narrow.

Consolidations
Summer and Christmas months repeatedly develop defined ranges; therefore, a range-based trading strategy may be more appropriate during these times (a common day trading strategy in quieter markets). This involves recognising overbought and oversold areas, more commonly referred to as support and resistance areas, and entering long (buy) at support and short (sell) off resistance.

As liquidity tends to decrease, trend trading is also difficult on the higher timeframes. Drilling down to intraday timeframes such as the H1, M30, etc., is an option, allowing traders to participate in intraday trends, involving moves generally lasting no longer than a day.

Macroeconomic Data
Although holiday trading typically forms ranging movement, markets can, and frequently do, respond sharply to surprise (scheduled) data. Given the lack of orders in the market – bids/offers from larger players – chart action can extend beyond expected levels.

Liquidity works in two ways. Lack of liquidity generally suggests limited trading ranges, though, with a spark (a surprise macroeconomic event, for example), a price spike in either direction can emerge. Limit orders form the floors and ceilings of a market – the liquidity, while market orders consume liquidity.

As a result, traders are urged to remain cognisant of any market-moving events projected to yield a medium to high impact (you can find this information on most economic calendars).

Technical Analysis Still Works
While holiday months reveal slow markets, technical analysis continues to offer structure. Figure 1.A illustrates a EUR/USD H4 chart, displaying a number of key technical levels in force. The 100-period SMA, as you can see, capped price action on several occasions during the months of June, July and August. Supply and demand also maintained a position, with demand formed in early June holding mid-month, though once consumed was also respected as supply. Trendline studies also offered a ceiling of resistance throughout the summer months, capping upside repeatedly and offering profitable trading opportunities.

Figure 1.A

Risk Management
Risk management is vital in all market conditions, not just the holiday periods.

Holiday trading can produce unfavourable events that can drastically deplete your account. For this reason, always set protective stop-loss orders.

Another important consideration is the location of stop-loss orders. Holiday trading generally has volatility subside, so adjusting stop-loss levels and take-profit targets to accommodate this is often necessary. For instance, if you normally allow a stop-loss distance of 50 points, consider reducing to 30 points. The same applies to take-profit targets, but it’s still vital to ensure risk/reward is favourable.

Sometimes the Best Trade is No Trade
Many claim its best to cease trading activities during holiday periods. Spending time with the kids, taking a trip you’ve always spoken about – you could even invest time in researching additional strategies. The markets will be there when you return.

While a valid argument, some traders still profit during this time. If you remain attentive and adhere to a strict risk-management approach, holiday trading is possible. Of course, this is a trader dependent.

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