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Thinking of Trading Today? Read This First!

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Thinking of Trading Today? Read This First!

Post by Sean on Thu Nov 27, 2008 4:58 pm

Thinking of Trading Today?
Read This First!

By Sean Hyman

Happy Thanksgiving Traders!

So how is Forex trading around the holidays? Glad you asked.

The Forex market plays by its own rules on Thanksgiving Day (and the day or two afterwards for that matter). There's no one rational trading theme you can follow, because the market jumps erratically all day.

So why is the Forex market so crazy around the holidays? In my opinion, the inter-banks take advantage of the thin liquidity (volumes) around all major holidays. Also, to add fuel to the fire, retail traders are the only ones trading.

Honestly, the pros know better than to trade on major holidays. Liquidity is so thin that spreads tend to be wider between the buy and sell quotes. That means your trading costs temporarily go up.

Couple this with the greatly added risk of trading on the holidays and you stack the odds against you as an individual trader.

The big inter-banks know this. That's why they're trading.
The Inter-Banks Are Thankful You're Trading

The skeleton crew left behind at those banks is not going to make it easy for you to make money on the holidays. These workaholics have a hard time maneuvering in the Forex market around the holidays too. But they have a natural advantage. These traders make the Forex market.

So they can go from very tight, mundane trading into very volatile erratic trading and right back to the mundane again, just to shake up the markets. They also have a strategy where they can "gap" the prices.

Can you imagine that one moment you are trading at one price point and the next second, the price is instantly 20-50 pips in the other direction? A large inter-bank can move the prices like that.

They know that if they swing the market enough, the chances of you investing in the wrong pair increases. If you get a trade wrong, then they get a trade right, by default. I imagine that makes them feel better about missing Thanksgiving dinner with their family.

Check out the chart below that covers the day before Thanksgiving and the days after. As you can see, whoever was left at the inter-banks pulled out all of the weapons in their arsenal for the holiday weekend trading.

The Calm Before the Erratic Storm

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

So I think we've established that there are plenty of land mines you have to step through if you want to trade around the holidays.

Honestly, this rarely happens, so I always recommend that new investors simply don't trade on the holidays (unless of course, you have a professional choosing the trades for you - then that's different).

But, let's say you're a bit daring and you want to trade right after the holiday on your own. The New York session is closed because of the Thanksgiving holiday, so trading will be thin and light.

So how do you increase your odds of success? Well, for starters, your best bet is to start in the London session after Thanksgiving when their session is in full swing.

Trade the Most Liquid Pairs in the Most Liquid Session

The London session is the most liquid of all the sessions normally anyway, even more so than the New York session. So the first thing you want to do is follow the liquidity to the London market. You can trade the London markets from about 3:00 AM EST to 12:00 PM (Noon) EST.

Secondly, you will want to stick to only the most liquid currency pairs during that session. The most liquid pairs will be the euro/U.S. dollar (EUR/USD) and the pound/dollar (GBP/USD) pairs.

The EUR/USD will always be the most liquid and least volatile during London trading. It has more volume go through it than just about any financial instrument in the entire world.

So trade the EUR/USD mainly (or GBP/USD if you are a higher risk trader) in the London session.

Next, keep in mind that spreads will be wider (that means more fees for your market maker). Also, there could be gaps or wild swings so you'll need to adjust your risk to accommodate such wild wings.

Specifically, I would cut my trading size in half (half the lots you would normally trade). You will also need to widen your stops by AT LEAST twice as much as you normally do. Most people will need to at least triple the stop distance.

You don't want to trade with very close stops. These big inter-banks eat traders for lunch who try to pull that off around the holidays. So that's just asking to get picked off.

If you triple your stop losses, then cut your typical lot size down by two thirds, you still have the same amount of dollars at risk but a higher probability of winning during these times.

If you are a "risk adverse" trader, then please do yourself a favor and take a trading holiday over the weekend. Instead, crank up your trading the following Sunday evening or Monday morning.
Trading Around the Holidays Forces You to Change Your Strategy

To recap: If you want to trade over the holidays...

1. Only trade the most liquid trading sessions (the London market)
2. Only trade the most liquid trading pairs (like the EUR/USD and GBP/USD)

Follow these two hard and fast rules so you can secure better spreads and better fills (less slippage on your orders) and less erratic movements in the pair than others will have during the same time. All of this increases your odds while cutting down your costs as well.

It's always a good idea to adjust your trading strategy slightly to accommodate these new rules. Think of the holidays as a high-risk time to trade, so adjust your lot size and stops accordingly.

So, go enjoy your Thanksgiving dinner with your family. I know I will be. For the record, I'd just like to say what I'm thankful for. I'm thankful that I can do the job I love. I'm also grateful for my family of six and my lovely wife. God has truly blessed our family.

Happy Holidays!


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