Thanks to the release of StockstoTrade.com, I’m more slammed than ever so here’s a fine article written by student NP talking about holiday trading…I cover this topic in my TIMtactics DVD:
Holiday volatility has the potential of fantastic gains, but only if you know how to trade it. It is annoying without any effort whatsoever so you are better off knowing what you are doing or not playing the game at all. During this time of year a lot of market participants decide to take some time off and be with their families. It is almost like the summer time, but because even some of the summer holdouts take some time off. It ideal since you have so many closed or half days in the market.
This takes a lot of the volume out of the market and price swings can get more extreme. You can see this in the OTC market and it is really noticeable there. Remember the swings move in both directions, and it can be tough to call the direction and trade it right. Wisdom suggests sitting it out as well. However, there are certain securities especially low priced ones on major exchanges that can trade in a predictable pattern. The holidays for the markets starts around mid-December and ends around mid-January. If you check other markets like foreign exchange the same principles apply. The month long period around the holidays leads to volatility but the trend is sideways.
Sometimes the patterns of stocks on the major exchanges are predictable, and these become enhanced when the liquidity disappears. The explanation is that the movers of the stock are still there, but casual traders might be away for the holidays or whatever. At least that is one explanation. For people with a short-term strategy and the time to keep an eye on their positions there is a good opportunity.
The best thing in the world would be some news appearing during that time period so you could predict the direction. Business moves on despite the holidays, and if developments occur they might be announced. If you are keeping tabs on certain companies you might be expecting this news. It is interesting how the market is always surprised at news that is expected.
It takes a ton of experience to be able to trade extremely volatile markets. If you are going to venture into the OTC during this time period looking for momentum plays, then follow someone who is good at it. For the major exchanges it just takes patience and a keen eye. Obviously, having a community you can bounce ideas off of helps, but at least major exchanges are less volatile.
During times of low volume support and resistance becomes important. There is unlikely to be enough movement to really breakthrough resistance. There are still limit and stop loss orders out there. So resistance and support still apply. That range is what the trader can use. Buying the stock at support and selling at resistance. You have to be careful though, because it only takes one participant to make a decision that throws the pattern out of whack. Not all traders and investors are away from the market during these times.
There are not many strategies for trading the holiday slump in volume. Not all stocks are subject to the heightened volatility. Some might be annoying flat refusing to move. If you study the market enough you might spot some patterns and be able to trade.
One of the most popular things to do during this time is to take a break. The slump lasts a bit long into January and can annoy people who enjoy trading, because the market does not behave like normal. It might be time to take a load off if you haven’t had a vacation. The holiday slump is caused by people spending time with their families or traveling. You can always take a page out of their book and do the same.
If you’re going to insist on staying in the market then play it safe. The other problem with the movement during the slump is that you might get used to it. You might like the consistent movement between support and resistance. Then when volume returns the stock might never move. This might put you in a quagmire situation, and you’ll be kicking yourself if you have to sell for a loss just because you thought the whipsawing would continue.
If you can’t step away, but the prospect of the volatility makes you unhappy, then just look back on your year and analyze what you could and couldn’t have done better. A trader’s education never stops and there is always more to learn.