There are a lot of reasons to avoid trading on holidays. Market inactivity, lack of liquidity and unexpected behaviour may make trading on holidays very difficult. For this reason, most experts recommend that you take the day off. However, if you still want to trade the markets on holidays, understanding the inherent risks and dangers of after-hours trading may limit your risk exposure.
How is holiday trading done?
The same rules apply to holiday trading as they do to after-hours trading, which refers to the buying and selling of securities outside of regular trading hours. The rise of electronic communication networks (ECNs) has made after-hours trading a lot easier. ECNs are automated systems that match buy and sell orders for securities, allowing traders to interact electronically and anonymously over the network. In the case of forex, after-hours trading usually refers to weekends and holidays.
Risks of holiday trading
Many argue that a lack of liquidity defeats the purpose of forex trading. The forex market is dubbed as the most liquid financial market in the world, with a daily turnover of $5.3 trillion. Trading on holidays means you may won’t be able to capitalise on one of the biggest draws of the forex market. Additionally, since banks are closed on holidays and professional traders are on vacation, two-way trading is limited, which means prices may move very easily in one direction.
Given the lack of liquidity during holidays, unexpected events can create havoc in the financial markets. These events are not limited to financial news, but could include political developments and other noteworthy events from around the world.
Although lack of liquidity and unexpected events may create extreme volatility, what is more likely to happen during the holidays is nothing at all. Price action is so limited that most people may completely waste their time trading on these days. If you really want to work on holidays, your time will be better spent preparing for the next trading day.
Consider taking the day off, really
An often overlooked aspect of forex trading is the importance of mental clarity. Whether you’re a part-time trader or full-time day trader, spending time away from the markets is really important. Taking time off will give you a better sense of perspective, which can boost productivity and make you a better trader in the long run. So many traders are already concerned about taking time off because they don’t want to miss important events. This makes holidays a perfect time to step away from the markets. Nothing is happening anyway and when it does it can blow out your account in the blink of an eye. That certainly isn’t an attractive risk-reward ratio.
Although you may still make a profit trading the markets on holidays, your gains will probably be very limited. In the vast majority of cases, the risks far outweigh the reward.