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.
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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
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
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
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 breakouts
In 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
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.