With the holidays coming up, I'm sure many traders' minds are elsewhere. Many are probably busy buying presents, attending end-of-year parties, or day-dreaming about their trip to Tahiti. And that's perfectly normal. It's been a long, long year - who wouldn't want to kick back, have some eggnog, and open up some presents?
Of course, there are those of you who can't get enough of the markets and will want to trade and squeeze some pips out of the market ahead of Christmas. For all you brave and courageous souls, there's just one important thing that you should keep in mind when you trade this week - volatility.
Historically, volatility has died down during the Christmas week. This makes sense as traders start to chill out as Santa starts warming up his sled.
I decided to do some research of my own and see how true this was. I decided to gauge volatility by comparing the average pip movement (high minus low) of the week before Christmas to to the pip movement during Christmas Week. I calculated the average of these values from 2001 to 2010, excluding 2008, since there was some crazy volatility in December of that year.
Here's what I came up with:
As you can see, some of our favorite pairs all showed declines in pip movement during Christmas week. Average pip movement dropped by 23.60% for EUR/USD, 21.63% for USD/JPY, and a whopping 43.92% in GBP/USD.
Interestingly, it seems as if the Loonie and Swissy were relatively unaffected by holiday spirit, as the high-low range didn't vary too much.
Now how can we use this information to guide us in our trading?
Here are some tips could help you trade this week:
- Stop loss and take profit placement - Knowing that volatility dies down, it would be best to readjust your stop loss and take profit expectations. If a particular setup on EUR/USD normally yielded you 100 pips, it might be better to set a target of 70 to 80 pips, as volatility on that pair normally drops nearly a quarter of its average.
- Finding support and resistance levels - One way to use the average pip movement is to help you gauge potential support and resistance levels. If a pair has already moved between 75% to 100% of its average Christmas Week pip movement in one direction, then perhaps a reversal could be in play later in the week.
- Playing the Loonie - As I pointed out, USD/CAD hasn't seen as large a drop in volatility over the past decade as compared to other pairs. With GDP data and retail sales figures coming out from Canada late next week, we may see a substantial move in the pair, as thin liquidity might lead to a spike once the reports are released.
- Scalpers delight - With the holidays falling on a weekend this year, we could see some really dead trading on Friday. We may see some tight consolidation on that day, which could provide scalpers a steady environment to trade in.
Of course, there's no telling exactly how much movement we'll see this week. For all we know, traders will be super active and we could see some crazy moves in the markets. Just be prepared for anything and make sure to practice good risk management techniques so that you have a truly Merry Christmas! Good luck trading my friends!