As I write, the mercury is falling faster than BP’s share price, as are the odds for a white Christmas – currently just 1.83 in Aberdeen, and 2.5 in London.
I’ve had a few emails over the past week asking about my trading plans for the Christmas period and if I have any tips for this time of year.
Different traders have very different opinions about this. To some, the worst thing about trading over Christmas is the volatility.
To others, the best thing about trading over Christmas is – you guessed it – the volatility!
So what causes this volatility – and can we benefit from it? Or should we steer clear of it?
Trading tips for when the boss is on the ski slopes
Over the festive period, a lot of the biggest traders will go on holiday. With these large portfolios taken out of the markets, liquidity will be reduced. The result of this is that market moves can be more exaggerated, as sellers struggle to find buyers, and buyers struggle to find sellers.
The result can be some wild, unexpected swings.
To some traders, the words “wild, unexpected swings” will fill them with horror. To others it will get them chomping at the bit to get some of the action.
But, if you’re in the latter camp, before you jump in with both feet – beware!
Mind the bumps
From around the third week of December to the second week of January, the markets can be considerably more “lively” than usual. If you’re interested in profiting from these moves, there are a few important factors that you should bear in mind:
1. This volatility comes hand in hand with low volumes – which means that market behaviour will be very unpredictable. This may be okay if you’re scalping profits from short-term positions, but if you’re expecting to follow patterns over several days, now is not the time of year for hands-off trading. I’d recommend that you keep a close eye on how the markets are behaving, and manage your positions accordingly.
2. If you’ve been trading on a particular instrument for the past year, you’ve probably got a good idea of its daily range. And, no doubt, you use this knowledge to guide you when you place your stop losses and profit targets.
However, over the holiday period the increased volatility your instrument may experience means that your usual stops may be hit by a little market “wobble” – knocking you out of a trade. Bear in mind that if you move that stop out wider, you’ll be increasing your risk, so monitor your staking levels closely.
There is a simple solution to the stress and increased risk that Christmas trading involves.
It’s a solution that I’ve applied from late December to early January for many years – it’s served me well, and I’d recommend it to any trader.
It’s a little trick that I copied from those big “movers and shakers” in the markets (the ones who will be heading off to Courcheval and Whistler next week).
It involves turning off your computer, and taking a holiday!
I’m not suggesting that you take up skiing – my Christmas break these days has more to do with roaring fires and mince pies than après ski and black runs!
I usually close out my open positions on the 23rd, and get back to it in the New Year. In addition to enjoying the season’s festivities, I also use this time to give my trading records a run through – updating journals, balancing the books, and generally getting on top of all the “boring” admin stuff that comes hand-in-hand with trading.
But, if you prefer to keep up with the markets through the holiday period – remember to watch out for unexpected bumps …
In the next seven days …
Following the disappointing inflation levels revealed this week, economists will be anxiously pouring over the MPC meeting minutes released on Wednesday. They’ll be looking for hints of whether the tide of the committee is turning towards the views of Andrew Sentence, who’s been calling for an interest rate hike for some time.
Wednesday will also see the UK and US final GDP figures, which shouldn’t hold any surprises.
We’ll find out the numbers for sales of existing homes (Wednesday) and new homes (Thursday) in the US, which are expected to remain worryingly low.