As a forex trader, you probably want to make the most of every opportunity to accumulate pips in a favorable direction. You might be tempted to trade on holidays if only to avoid incurring commissions for deferring transactions. But is it worth it?
You should not trade forex on holidays. The analysis is more difficult due to unreliable signals and trading is riskier than usual. Your account is more likely to be wiped out during holidays. Also, there is low volatility, meaning it is more challenging to make a significant profit.
In this article, I’ll explain how holidays affect forex trading. I’ll also go over why it’s a bad idea to trade forex during holidays.
How Do Holidays Affect Forex Trading?
Holidays affect forex trading by increasing volatility in the period before and after the holiday and reducing volatility during the holiday. The lower volatility means that a currency pair can be static. But in some cases, the affected currency pair can experience unpredictable spikes and drops.
Most banks close during holidays. This might cause a delay in huge transactions made by institutional investors. Moreover, a good number of institutional investors are inactive during holidays.
Increased Volatility Before and After Holidays
Most unusual behavior in the forex market during the holidays can be attributed to institutional players like hedge funds. These players leverage so much capital that their effect on the market is substantial. Institutional investors prefer not to be exposed during holidays, so they protect their investments by hedging them.
Hedging can mean dumping volatile assets and buying more stable assets.
Usually, institutional investors hedge assets in the run-up to the holidays, resulting in a lot of volatility. After the holiday, they again assume new positions they consider favorable.
You can watch how public holidays affect forex trading in this Youtube video:
The Country the Holiday Is In
Some holidays like Christmas are global. They affect most countries that drive the forex market, including the US and European countries. However, some holidays are country-specific. These affect the currency pairs that contain a currency from the countries in question.
As a trader, you should keep track of major holidays in all the countries whose currencies you trade. Having country-specific calendars can help. Brokers also provide holiday information.
If a country has a holiday, you can avoid trading in affected currency pairs for the holiday period.
You can also not trade at all during a major holiday affecting multiple countries.
Why You Shouldn’t Trade Forex During Holidays
Trading forex during holidays is difficult for the following reasons.
Low Liquidity Reduces the Probability of Profit
One of the inherent advantages of forex trading is liquidity. Forex traders make transactions worth trillions of dollars every day. This is one of the factors that attract investors to the forex market. During holidays, the liquidity of forex drastically goes down. Banks and a majority of institutional players are usually inactive on holidays.
Since large players account for a huge volume of trades, their absence contributes to low liquidity.
Liquidity is important as it enables traders to make a profit. The whole point of a trader is to position themselves to benefit from the change in the value of an asset. Low liquidity limits the average rate of change, making it more difficult to make a profit.
Heavy Position Offloading Can Wipe Out Your Account
During holidays, a huge percentage of forex traders take a break. This includes many small players. Most importantly, it includes institutional players like hedge funds and banks. Because most of the players are away, the support and resistance traders typically rely on will be unreliable. This means that huge changes can occur without the usual resistance that the market offers.
Suppose there are a few hedge funds that are active on holiday. If they decide to offload their positions, it could significantly affect the market since the usual resistance is absent. Also, the positions held by institutional players are usually substantial. As such, once they’re offloaded, they could cause changes that can wipe out the investments of smaller traders.
Unreliable Signals Make Analysis Difficult
Signals are a huge part of forex trading. You use signals to predict the direction of the market with the hope of making a favorable prediction and turning a profit. The market gives off strong signals during normal trading days when most players are active. If you know how to read them, they can be a reliable guide to successful trading.
During holidays, most players are inactive, and the market behaves abnormally. As such, the signals become unreliable.
The market could be affected by unusual behavior at any time. For example, if an institutional investor decides to offload their position, the signals are rendered useless.
It becomes easier to lose money because you don’t have the necessary information to protect it. Moreover, it also becomes difficult for you to make money.
If you are a day trader, trading during holidays becomes an especially bad idea. The day will probably be full of unusual activity, and your probability of having a successful day is minimal.
Brokers Raise Spreads During Holidays
The spread is the difference between the amount a broker charges for bid and ask transactions. It shows the broker’s profit and affects a trader’s profit. The higher the spread, the lower the money a trader will make with one broker compared to other brokers.
During holidays, brokers raise the spread to try and cushion themselves against lower profits from reduced transactions. They know that fewer transactions will be happening, so they raise the profit they make per transaction.
After the holidays, they typically revise their spreads accordingly.
Trading during a holiday will expose you to higher spreads. If you don’t want to pay your broker more, you should avoid trading during major holidays.
Trading forex on holidays is a bad idea, especially if you’re a day trader. The market behaves abnormally during that period and becomes difficult to predict. Additionally, liquidity and volatility are low. As such, it’s difficult to make a significant profit on a holiday.
Some holidays have the opposite effect of erratic spikes. Since these are difficult to predict, you can’t take advantage of them. It’s more likely that they’ll work against your positions, and you’ll incur losses.
You should also watch out for the period before and after the holidays. It can get volatile and treacherous.
- Investopedia: How Is Spread Calculated in the Forex Market?
- PaxForex: Should You Trade Forex For The Holidays
- Quora: Is It Wise to Trade Forex if It’s a Public Holiday in One of the Countries?
- Forex Academy: How Do Public Holidays Affect the Forex Market?