If you've been trading markets long enough, you will likely find that sometimes there might be unusually big moves during a holiday period - even if there is hardly any news to justify them. Well, sometimes the answer isn't about the news at all. It is just simply the fact that there aren't enough buyers and sellers around.
Just imagine you are trying to sell your car for $5,000. On any normal day, you probably would have ten or even twenty buyers competing to purchase the car. But what happens if most of them are away on holiday? Suddenly, you may just have only one buyer showing interest and he/she now has a lot more bargaining power to try and get you to move your price lower than $5,000 to get the deal done.
Well, markets are not all that different in that sense.
In holiday-thin trading conditions, there are fewer market participants around to absorb buy and sell orders in general. That is likely to lead to wider bid-ask spreads and potentially worse execution prices. In turn, that could lead to exacerbated price swings considering that there are fewer orders in play.
So as a trader, what can we actually do about this situation?
At the very least, I'd definitely be more cautious about chasing any sudden price moves. Let's say for example we see EUR/USD move up by 40 pips in 5 minutes during a quiet holiday session. That might seem like an exciting breakout opportunity, especially if the chart also looks appealing. But ask yourself, is there any really strong buying conviction behind the move? Or is it simply because there aren't enough sellers around to keep prices in check? That is something worth pondering over before jumping into the trade.
Besides that, I would also look to make use of position sizing during such times. Trading smaller can help a lot in reducing your exposure when markets have the tendency to be unusually jumpy.
However, perhaps the best thing you can do is to know when to sit on your hands. There is absolutely nothing wrong with sitting out a holiday-thinned trading session and waiting for market conditions to return back to normal. After all, sometimes protecting your capital is the best trade you can make.
This article was written by Justin Low at investinglive.com.from Investinglive RSS Breaking education Feed https://ift.tt/UwWfk1Y
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