Trading tips for navigating the summer months
Seven tips for getting the most out of the summer market
It was Ella Fitzgerald who performed the song 'Summertime'. The iconic opening lyrics are, of course, 'Summertime and the livin' is easy'. Well living may be easier during the summer months, but trading can often be more challenging.
During the summer months large market players go away on their vacations. The lack of market participants means that volumes can drop, ranges can narrow, and volatility can increase due to the low liquidity patches. This can result in some frustrating trading experiences and being stopped out on nonsensical market moves due to the low liquidity.
Learn more about how to trade the right way this summer
Trade can also frustrate by not reaching profit targets because of the narrower ranges. This article will give you seven tips to help you to be prepared for the summer months, with August being particularly slow, and to make sure you are not taken by surprise.
1. Set smaller targets
During the summer months you might consider reducing your targets. Ranges can be limited, so take profit earlier than normal. Say for example you normally took profit at 60% of the daily average true range, you might consider taking profit at 40% of the daily average during the summer.
2. Set wider intraday stops
This may sound counterintuitive, since if ranges are narrower shouldn't you use smaller stops too? The problem is that low liquidity can result in sharper price spikes which happen in low liquid markets. The lack of orders means that price can move much more wildly, and for no apparent reason.
A good example of this type of market can be seen each week at the Sunday open when price can swing quickly in an illiquid market. The same phenomena can occur in summer markets too. By placing wider intraday stops you can make sure that you are not taken out unnecessarily by an illiquid move, only to see price return to your desired direction.
Of course, if you set wider stops make sure that you have reduced your position size to allow for the larger stops.
3. Don't switch off
The market is still active and, although typically quieter, there is still plenty of scope for surprise and opportunity. At the moment the UK is in the middle of a protracted Brexit negotiation with the European Union. There is also a potential domestic political struggle for the British Prime Minister Theresa May who may face a leadership challenge from those unhappy with her proposed negotiating approach with the EU.
As a consequence, the GBP will remain sensitive to political developments and many market participants are reluctant to commit too heavily to the GBP with so much Brexit uncertainty. Remaining switched on to react quickly to any major change in developments could pay dividends for the savvy and attentive investor. So, pay attention to the news which has the potential to disproportionately move markets in slow summer markets.
4. Pay attention to technical levels
The markets still technically behave in the same way and traders will still look to limit and define their risk against key technical levels. Key moving averages to pay attention to are the 100 and 200 period moving averages. In the daily GBP/USD chart below you can see how price was supported against the 200 and 100 moving averages at the end of August 2017.
5. Trade ranges and beware of false breakoutsIn the EUR/USD chart below price has been contained within a range during the summer months. Ranges are less likely to break in the summer months and the lack of participants, during very quiet times, means that any price breakouts should be viewed with suspicion as false breakouts are more likely during reduced summer trading. This can provide good places to fade the false breaks.
6. Be prepared for conditions to start to normalize in coming years
One of the notable changes in recent years has been the advent of algorithmic trading. These computers are run throughout the year and produce consistent returns month after month. The change that they will bring to the financial markets will mean that liquidity will be there, even in the quieter months.
The large institutions may be on holiday, but the algorithmic trading can be kept switched on and making a profit. The business model of the high frequency traders is short term and involves the capture of profit day after day, so it makes sense to run them throughout the year. In an age of increased automation, especially in the trading of assets and FX, this will undoubtedly have an increased effect and smooth out some seasonal variations.
7. Take a vacation
The summer months offer some of the best weather, schools are on holiday, and the markets will always be there when you get back. So, one solution for quieter months is to take a break.