What Happens to Stocks During the Holidays and How Should You Trade?
★ SUMMARY ★
How do stocks move during the holidays? And how should you trade them?
First of all, let’s take a look at the different types of days to really be concerned about or interested in when we’re talking about holidays. It’s important to look at full closing days and half days. Then you also have summer time, Christmas, winter time, holidays and breaks.
And also there are major announcements, which are earnings months, federal reserve announcement weeks, things like job reports and other unexpected news as well.
Holidays can really affect the market because people go on vacation, they spend their time with their families and they are away from the computer much longer, which means they trade less, or trade lighter.
This has some consequences in the marketplace. Basically, you have low liquidity, which means it’s a little tougher to get in and out of trades, especially if you are trading stocks with fewer shares.
During holidays, sometimes you also get low volatility, meaning the market barely moves. It’s almost like a flat line. Stocks move around a lot less, which decreases your earning potential.
The other thing is you may get erratic market movements, this means stocks will move completely different, in a weird way, not in a way you would normally expect. This happens because the people trading during holidays are usually different traders than those who trade during the rest of the year.
How to trade under these conditions?
The first thing you should do is stick to safer positions, be more picky about the trades that you put on, and also wait for extra confirmation signals before you make any decision.
The next thing is, trade lighter. Either fewer shares or wider/tighter in your option contracts, depending on the type of spreads that you’re doing. Trading lighter helps you reduce exposure in the market and lightens your risk.
And finally, you can also reduce risk by taking profits sooner while trading under holiday conditions.
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