National public holidays can hit even the most unexpected trader’s plan. As exchanges and banks closed completely or operate on lesser hours, it is important not to be caught off guard by surprise festivities when traders plan their trading schedule and strategy.
Looking at three of the most crucial stock exchanges as an example already 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.
With that, what is the impact of this for traders’ trading schedule, and how can they plan for disruption in the markets?
First of all, the instruments used in trading will identify the kind of action to take. For stocks, this is straightforward. When the exchanges are shut, traders can’t enter a trade.
But several exchanges also close early on days surrounding the most culturally significant holidays.
For instance, on Christmas Eve and New Year’s Eve – neither are part of the U.K.’s eight official bank holidays -, the London Stock Exchange closes the shop early at 12:30 at local time.
Be cautious not to be caught by less apparent adjustments to the schedule similar to this.
Then, this will get more complicated if traders consider the implications decreased activity has for forex, CFDs, and spot metals.
Traders must keep a close watch on the economic calendars given by their brokers and focus on bulletins about schedule changes for different asset classes.
The question is, what would be its effect on currency trading?
The over-the-counter (OTC) nature of the forex market indicates that trading stays open 24 hours a day. But major public holidays might affect the overall liquidity of the market.
In case U.S. or U.K. banks closed due to a holiday, this will probably lead to a significant decrease in trading volume in the market.
In practice, this will most likely end up in a more volatile and unpredictable market or a static market with lesser trading opportunities. Also, the reduction in active traders may cause spreads to boost.
This type of short-lived volatility in the markets is unlikely to disturb traders with long-term positions open.
But, for traders who seek to capitalize on short-term movements, they might find that a constricted trading volume makes the markets more difficult to read.
Pre-Holiday Impact and Buoyed Market Sentiment
Meanwhile, this is not all bad news. As activity on the actual holidays might be more challenging or even impossible, a broad, recognized phenomenon named ‘the pre-holiday impact’ could make trading directly before a public holiday more appealing.
In addition to that, the pre-holiday effect describes the influence of a national celebration on the market mood.
Linked primarily with stock trading, the trend looks like it is affecting traders with a widespread sense of optimism that spikes on the day preceding a public holiday.
Historically, this has ended up in greater average returns than a typical trading day.
But still, investors need to remember that there is no sound economic basis to this supposed uplift. And when it happens at all, it is all a result of trader psychology and must never be treated as an inevitability.
Investors should treat these kinds of fickle behavioral tendencies towards taking positive positions with caution.
At the same time, an awareness of this impact might be useful in assessing possible market sentiment.
Above all, an essential thing to note about trading on or around public holidays is always prepared.
Traders should ensure they are aware of any possible changes to trading hours and stay sensitive to any anomalies changes of events might throw in the way.
Disclaimer: The content of this article is sponsored and does not represent the opinions of Finance Magnates.