Mistakes to Avoid When Trading During the Holiday Season

Trading during the holidays can be a double-edged sword. Typically, there are thinner trading volumes which may amplify trading moves. But some investors believe it is one of the best trading periods thanks to the Santa Rally which we discuss in another article. 

If trading is indeed in your holiday plans, remember to stick to your trading strategy and not let emotions colour your decisions. Also, check out these common mistakes to avoid.

• Skipping Due Diligence

The days when the markets are closed are fairly simple to navigate. The problem arises when open days are not followed by settlement days.

Let’s say, you are trading on a Thursday in a T+1 settlement arrangement for transactions. But the next day is December 25th, when markets are closed for Christmas. Your trade will be settled on the next market open day, which will be Monday, December 28. That is effectively T+4 days. Did you account for market volatility during the long weekend closure? And did you consider if any rollover charges may apply? If not, you may be in for a shock (or surprise, if the markets favour you) on Monday. 

Your broker may or may not levy overnight charges, depending on their trading terms. You must ensure that the holidays do not turn into mandatory overnight holdings and associated charges.

• Discounting Low Volumes

As professional and retail investors take time off and news flows decrease, trading volumes decrease significantly during the holiday season. This means lower market depth and orders taking longer than usual to be filled. Spreads could also widen as volumes decrease, which impacts the overall cost of trade.

Higher opportunity costs may disrupt your financial plan. Adapting to such trading conditions is paramount to having a robust trading strategy. 

• Overtrading

Do you have extra time on your hands during the holidays? While it might be viable to stretch your trading session a bit, spending too much time observing the markets and trying to capture every market opportunity can cause information overload.

Overwhelming your brain with too much analysis can give rise to confusion. It is better to develop a trading schedule and maintain discipline. Taking necessary breaks to assess your performance, winding down and recharging your brain is crucial. It helps you choose the right opportunities to meet your financial goals and make the most of them. Another great way to use the extra time is to test out new trading strategies on a demo account.

• Emotional Trading

Holidays bring joy and excitement. This can make you over-optimistic. The markets, however, require a centred mindset. Letting your holiday enthusiasm spill into your trading decisions can lead to overtrading while fear of lower volumes could cause under-trading, both of which can have undesirable outcomes for your portfolio. Also, remember that approaching the markets as a means of quick money for your holiday spending is not a good idea. 

Ensure that fear, greed or market euphoria do not cloud your judgment. Stick to your trading strategy and make analysis-driven decisions. Technical, fundamental, and sentimental analysis still apply, maybe more so because lower volumes add to the risks.

• Failing to Adapt to Market Conditions

Your portfolio has been performing satisfactorily for the last few weeks, and you do not want to alter your trading strategy. This could work under normal market conditions. However, during the holiday season, the performance of various sectors changes. Fine-tuning your trading strategy to these instruments can help identify more opportunities in the reduced-volume environment. 

PwC has forecasted spending per shopper to rise by 7% on average in 2024. What do you think these shoppers will buy? Sectors, such as retail (food, electronic items, apparel etc.), logistics, and eCommerce demonstrate higher consumption during the holiday season. Increased consumer spending and confidence lend support to these segments. While keeping room for safe havens is necessary to hedge your portfolio, rebalancing your holdings is important to make the most of market opportunities. Getting exposure to indices with a higher weightage for these sectors could be an effective trading decision. 

• Chasing the Market

Chasing the markets is always a bad idea because your trading decision is based on recent price movements only. You forego thorough technical and fundamental analysis. This means the profit potential of the position is significantly reduced by the time you open the trade or worse, it does not even align with your trading goals. This may result in unfavourable trading outcomes.

• Not Managing Risk

Forgetting about risk management may see you end up on Santa’s ‘naughty list’. Since price swings tend to widen during periods of low volume trading, hedging your positions is even more important during the holiday season. Using derivative instruments, like contracts for difference (CFDs), allow you to take advantage of both rising and falling prices. Hedging a bigger position in your speculated direction with a smaller one in the opposite is a popular risk management technique.

Using leverage increases your purchasing power to enable you to explore more opportunities. However, ensure you apply appropriate risk management measures since this will amplify your profit and loss potential.

To Sum Up

• Consider how lower volumes and delayed order fulfilment may impact your portfolio.
• Do not over-trade just because you have more free time or under-trade out of fear.
• Watch out for holiday enthusiasm spilling into your trading decisions.
• Rebalance your portfolio to take advantage of market changes during the holiday season.
• Avoid chasing the markets and trust your analytical skills to make informed trading decisions.
• Ensure appropriate risk management for every position.

Disclaimer

All data, information and materials are published and provided “as is” solely for informational purposes only, and is not intended nor should be considered, in any way, as investment advice, recommendations, and/or suggestions for performing any actions with financial instruments. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation or needs, and hence does not constitute as an advice or a recommendation with respect to any investment product. All investors should seek advice from certified financial advisors based on their unique situation before making any investment decisions in accordance to their personal risk appetite. Blackwell Global endeavours to ensure that the information provided is complete and correct, but make no representation as to the actuality, accuracy or completeness of the information. Information, data and opinions may change without notice and Blackwell Global is not obliged to update on the changes. The opinions and views expressed are solely those of the authors and analysts and do not necessarily represent that of Blackwell Global or its management, shareholders, and affiliates. Any projections or views of the market provided may not prove to be accurate. Past performance is not necessarily an indicative of future performance. Blackwell Global assumes no liability for any loss arising directly or indirectly from use of or reliance on such information here in contained. Reproduction of this information, in whole or in part, is not permitted.