National public holidays can throw a wrench in even the most experienced traders’ plans. With exchanges and banks shut completely or operating on reduced hours, it’s crucial not to be caught out by surprise festivities when you are planning your trading schedule and strategy.
Taking just three of the most important stock exchanges as an example shows the extent of the problem: in 2019 the Tokyo Stock Exchange will observe twenty holidays throughout the year, London ten, and New York nine. So, what does this mean for your trading schedule and how can you plan ahead for disruption in the markets?
THE IMPACT ON INSTRUMENTS
First thing’s first: the instruments you’re trading will determine what kind of action you need to take. With stocks, this is straightforward. If the exchanges are shut, you will not be able to trade. So far, so simple. However, some exchanges also close early on days surrounding the most culturally significant holidays; for example, on Christmas Eve and New Year’s Eve (neither of which are one of the UK’s eight official bank holidays) the London Stock Exchange shuts shop early at 12:30 local time. Be careful not to be caught out by less obvious adjustments to the schedule like this.
It gets more complicated still when you consider the implications decreased trading activity has for forex, CFDs and spot metals. Traders should keep an eye on the economic calendars provided by their brokers and pay attention to bulletins regarding schedule changes for different asset classes. Take FXTM’s trading schedule for the US public holiday, Presidents’ Day, as an example. Traders are notified that it’s a non-trading day for US Shares, as expected, but that there’s also an early close to trading for spot metals, spot commodities and spot indices to take into account.
So, what’s the impact on currency trading? The OTC (over-the-counter) nature of the forex market means that trading remains open 24 hours a day, 5 days a week. However, major public holidays may affect the overall liquidity of the market. If US or UK banks are closed in observance of a holiday, this will most likely result in a significantly decreased trading volume in the market. In practice, this may result in a more volatile and unpredictable market or a static market with fewer trading opportunities. The decrease in active traders might also cause spreads to increase.
This kind of short-lived volatility in the markets is unlikely to faze traders with long-term positions open. However, traders who are looking to capitalise on short-term movements may find that a constricted trading volume makes the markets harder to read.
THE PRE-HOLIDAY EFFECT AND BUOYED MARKET SENTIMENT
It’s not all bad news. While activity on the actual holidays may be more difficult or even impossible, a widely recognised phenomenon called ‘the pre-holiday effect’ might make trading directly before a public holiday more appealing.
The pre-holiday effect describes the impact of a national celebration on the market mood. Associated primarily with stock trading, this trend seems to infect traders with a widespread sense of optimism that spikes on the day preceding a public holiday. In the past this has resulted in greater average returns compared to a normal trading day. Investors should note, however, that there is no sound economic basis to this supposed uplift; if it happens at all, it is purely a result of trader psychology and should never be treated as an inevitability.
Of course, while investors should treat such fickle behavioural tendencies towards taking positive positions with caution, an awareness of this effect could be useful in assessing likely market sentiment.
As ever, the most important thing to remember about trading on or around public holidays is to be prepared. Make sure you are aware of any changes to trading hours and remain sensitive to any anomalies the changed circumstances might throw your way.
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Original from: www.dailyforex.com