Occasionally illiquid markets are a fact of life for traders and this week’s fourth of July holiday is one of those holidays that causes this reality. There is a running argument among traders on whether or not to trade these markets. The answer to the question lies in your process and your plan. If you don’t have a plan, then stop reading this and take the time to write one during these slow holiday markets. If you do have one, bravo…please read on.
One of the advantages of having a complete and thorough trading plan is in the answering of the inevitable questions that come up as you progress along your path to consistent profitability. Holiday markets is one of those questions you may not have thought to cover when writing your plan. Why are illiquid markets bad? While its true that price can against you move more quickly and with more volatility than in liquid markets, it is also true that they can move in your favor just and quickly. Again, the answer lies in your process.
When creating your trading process, did you do some form of back-testing, whether manual or otherwise? If so, did you filter out holiday markets or did you include them? It’s very difficult to separate illiquid days as there are often other factors dictating liquidity, but it is easy to filter out holidays recognized by the markets, as they are announced by banks and exchanges 12 months in advance. If you did not remove them from your testing, you should either go back and look at the results with holiday trading and without, or you must trade them. One could also research the idea of lower risk in holiday markets, realizing that market-makers will be temporarily pricing in higher volatility, and therefore a normal trade will cost you more. You can shrink your position size and get comparable results, but this also must be researched. As always consistency in process is the largest factor in success long-term when it comes to trading and this apples to holiday markets as well.
Enjoy the holiday and if you aren’t sure what to do in holiday markets, take the time off and research it. Don’t guess or you will end up with some fireworks going off in your account that you will not have you singing the Star-Spangled Banner.
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