How to Trade During the Low Volume Holiday Session

Most people enjoy the Christmas holidays because they have a chance to unwind and relax with family and friends. Unfortunately, for traders the holiday season can be troublesome and if they are not careful very dangerous.

The biggest problem traders face during the holidays is low volume. Although it doesn’t sound like a big issue, low volume creates inconsistent volatility and unpredictable price swings. If traders are not careful, they can quickly accumulate loses.

Because December isn’t finished let’s take a look at December contracts of for the S&P 500 mini contracts. This is probably one of the most active contracts in the futures market and even though volume remains high, it is much lower compared to other years.

The December contract, which is settled in at the end of the month only traded 16,719,197. In November, the December contract had a volume of 54,560,838 and in October it had a volume of 41,896,636 contracts.

The volume for the December contract decreased by more than 59% between November and December. Another factor for the low volume could be that the December is the final month of the contract, which means by this time, most traders have focused their attention to forward March contract. As another example, let’s look at light sweet crude oil futures, which is a monthly contract. The January 2010 contract, which trades in December, had a total volume of 4,199,634. The December contract traded 4,937,356 contracts in November. That represents a drop of more than 14%.

Looking at the monthly oil chart, we can see that the price swung in a fairly wide range with resistance at $91.00 and initial support at $87.00. On Dec 7, which had the highest activity during the month, hit a session high of $90.76 and a session low of $88.04. Despite the volatility the price ended the session in relatively neutral territory. The holiday trading usually begins after Thanksgiving. Markets are closed on the Thursday and are only open for half a day on the Friday. The week after thanksgiving is probably the last big trading week before the Christmas break. Most of the big investors and institutional traders use that time to close out most of their positions.

Most institutional traders will have some positions in the marketplace; however these positions are much smaller because of the increased risk and lack of focus. Instead of thinking about the markets, the active traders are thinking about how they are going to spend their earnings made during the rest of the year. Like the rest of us, traders want to take the holidays to relax and unwind.

With most traders take a break the people who are left to play in the marketplace are the ones who are a little bit more desperate. Instead of thinking about the holidays these traders are thinking about making their quote. These traders will to try to capture the big moves; however this is associated with higher risks. It doesn’t really matter why volume is low but it is important to recognize that it can create wild swings.

If you are going to trade during the holidays it is important to have a defensive strategy, taking your profits and cutting your losses quickly will help you protect your capital and maybe insure that you have a happy and stress fee holiday.

For more updates from Greg, be sure to visit his blog at TheTradingZone.com