There is no doubt that we live in a globally interconnected marketplace. What occurs in one region of the world will have a nearly immediate knock-on effect in another. This very same principle applies to public holidays in reference to electronic trading. Not only will market closures need to be taken into account by the average investor, but knowing when they are occurring can help to provide astute traders with a slight edge. Let’s take a look at some examples of how holidays can have an impact upon global trading.
What is the Pre-Holiday Effect?
Unless you are an expert in technical analysis, this term may seem slightly unfamiliar. In actuality, the pre-holiday effect can have a massive influence upon trading strategies. It has been shown that on the final day of trading before a holiday (such as Boxing Day in Canada or Labor Day in the United States), the markets tend to exhibit less liquidity and equity returns are historically higher (1). Depending upon which markets may be closed, keeping this in mind can help traders turn a short-term profit.
Another obvious impact that public holidays will have upon a trading strategy is the potential that a certain position cannot be settled. Let us use an example to highlight this point.
John had purchased holdings in a company listed on the London Stock Exchange. This purchase was made on the Wednesday immediately before Good Friday. He was unaware of this holiday and he also forgot that Easter Monday would soon follow. As he would not be able to sell his position through traditional means until the next Tuesday, he incurred losses that may have otherwise been avoided had he been aware of these holidays within the United Kingdom.
So, it is clear to see that a bit of foresight could have gone a long way in this example. This is the reason why those who wish to stay ahead of the curve employ the Next Generation software offered only through CMC Markets.
Difficulties with Liquidity and Analyses
There are some traders who wish to execute positions while a certain part of the world is on a holiday. One instance can be seen in the Forex industry. This market can be broken down into four regions:
Assuming that a trader from the United Kingdom wishes to take up a GBP-USD position, what are the risks? First, we should recognize that there is likely to be much less liquidity during this session. Less liquidity tends to make technical and fundamental analyses more difficult. This heightens the chances that a pair may move in an unforeseen direction. The possibility of accruing short-term gains is likewise lowered. To put it another way, there are simply less traders on the market. Intra-day movements are fewer and profit margins are not as significant. This is particularly the case when referring to major financial regions such as Europe and the Americas.
Still, the exact strategies and approaches employed will naturally depend upon the investor in question.