During the summer months, large market players go away on their vacations. The lack of market participants means that volumes can drop, ranges can narrow, and volatility can increase due to the low liquidity patches. This can result in some frustrating trading experiences and being stopped out on non-sensical market moves due to the low liquidity. Trade can also frustrate by not reaching profit targets because of the narrower ranges. This article will give you two tips to help you to be prepared for the summer months, with August being particularly slow, and to make sure you are not taken by surprise.
1. Set smaller targets
During the summer months, you might consider reducing your targets. Ranges can be limited, so take profit earlier than normal. Say for example you normally took profit at 60% of the daily average true range, you might consider taking profit at 40% of the daily average during the summer.
2. Set wider intraday stops
This may sound counterintuitive, since if ranges are narrower shouldn’t you use smaller stops too? The problem is that low liquidity can result in sharper price spikes which happen in low liquid markets. The lack of orders means that price can move much more wildly, and for no apparent reason. A good example of this type of market can be seen each week at the Sunday open when price can swing quickly in an illiquid market. The same phenomena can occur in summer markets too. By placing wider intraday stops you can make sure that you are not taken out unnecessarily by an illiquid move, only to see price return to your desired direction. Of course, if you set wider stops make sure that you have reduced your position size to allow for the larger stops.