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What "Labor Day" Does to the Currency Markets

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What "Labor Day" Does to the Currency Markets

Post by Sean on Thu Sep 04, 2008 7:20 pm

It's Labor Day: Sit Back and Relax
But Don't Bother Trading

By Sean Hyman

Good day Currency Traders!

Many traders forget about the markets when the holidays come around.

After all, the banks are shut down along with many other businesses. Most traders - even the professionals - are focusing more on that neighborhood barbeque or taking weekend vacations with their families. They're not exactly tuned in to the markets.

So how do the markets react while most of us are away? After all, the forex market is technically "still open for business" - especially on holidays like Labor Day (the traders on the other side of the world don't take a holiday simply because we are).


"Enter At Your Own Risk"

But, in my opinion, the forex market should post a sign that says "Enter at your own risk" during major U.S. holidays.

I say that because the forex market is like a renegade switch on most holidays. The market is either "turned on" and your trades are moving like crazy (which means it's hard to predict what will happen next). Or the market is completely "turned off," and it's about as interesting as watching paint dry.

More often than not, you'll see BOTH scenarios happen on a single holiday. First the market will be switched on, and then it will suddenly switch off - or vice versa. Unfortunately, there's never any telling which comes first...the "calm" or the "storm."

So on any given holiday, I generally spend time with my family and later I check on the currency markets in mid-afternoon. Then I just wait for the "show" to start. Frankly, for a seasoned trader like myself, it's fun to watch the markets move that fast.

But it's also a time when only novice traders dare to trade.


When the Pros Are Away the Poor "Novice Cats" Play!

In fact, all the pros stay far away from the markets on holidays. That's why there's such a lack of volume in the markets. It's also why your trades can move so easily.

Let me explain this another way...

Have you ever compared a liquid with an illiquid stock trade? If not, it's quite extraordinary. An illiquid stock can take off one day and then sit still the next. The price jerks all around without any rhyme or reason.

On the other hand, a liquid stock that trades thousands of shares a day has a very smooth, discernable trading pattern. This type of stock can move up or down, but either way, it does so slowly and deliberately (at least during trading hours).

Well, the currency market becomes that "illiquid stock" on market holidays. When the currency pairs move, they make huge jerky movements that are nearly impossible to track. Personally, I just get out the popcorn and wait to be entertained. In fact, I can almost see the novice traders watching in horror as their favorite currencies jerk around like drunken sailors.


Even the Most Liquid Currency Pair Can Punish You During Holidays!

To get an idea about what I'm talking about, let's take a look at how the supposedly most liquid currency pair in the market: The euro vs. U.S. dollar pair (EUR/USD) reacts during holidays.

For starters, last year the EUR/USD pair took a huge dive right before Thanksgiving. It's easy to see why: The pros didn't want to go into the holiday holding such a liquid position. Remember, they know full well what can happen.

Then Christmas came and this pair slowed to a near stop. But then the pair shot up like crazy for no discernable reason. I'm sure that shocked the novice traders because the pair looked like it was "trending down" from Thanksgiving through Christmas.

Then in an instant, without warning, it's as if someone took control of the market and wiped out all the novice traders who tried to short the EUR/USD pair.


[You must be registered and logged in to see this image.]
Then came New Year's Eve...This time the EUR/USD pair plummeted and knocked out any novice traders who were betting the pair would rise further.

Just as these traders lost their shirts going into New Year's Day the pair broke back to the upside coming out of the holiday.

If the most liquid pair in the currency market can react like this, imagine how fast some of the less liquid pairs can move during holidays (and not just U.S. holidays, but any major holiday around the world).

So what if you "dared" to mess with one that had much less volume during a holiday? Let's take a look...


Less Liquid Pairs Take You for an Even Wilder Ride!


[You must be registered and logged in to see this image.]

Trading on These Swings Is Like Playing With Fire

You can double or triple the impact of the move when you're talking about messing with more volatile currency pair during these same times. For instance, the British pound/Japanese yen (GBP/JPY) moved 400 to 700 pips in just a couple of days last year during holiday time.

Before you pull out your calculator to see how much you would have made on trade (had you been lucky enough to call it right), let me tell you that far more traders completely drained their accounts on this losing trade.

After all, you'll note on the chart above that a break out can extend 100 pips or so during a holiday week. So in theory, if a pair goes jumps or falls 100 pips, it should continue in that direction. But this simply doesn't happen during a holiday. Instead pairs can dramatically shift and move the other way just as fast. And it fools the beginning traders every time.

Can you see why the pros steer clear of the currency markets? It's because they're shrewd money managers and not greedy gamblers. They also save a ton of money by playing it safe.

So don't get caught up in this trap. Just sit back and watch it. You don't have to necessarily close out your positions, but don't be concerned when you see dramatic swings in volatility. Just sit back and wait until the markets stabilize after the holidays.

And in the meantime, grab the popcorn and watch the show!

Happy Labor Day!

Sean

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