Friday, 12 April 2013

How Important Are Your Friday Trades?

Excel Markets ECN Forex Broker Demo Account Trading Contest - $10,000 Cash Prizes! - April 2013Are trades you make on one day of the week more important than another day?  Why should there be any difference, you might ask, when the trading is done online, and the day should not really matter?  The market opens early Monday in the Asian market, which equates to 22h00 or 23h00 Sunday Dublin time, and 17h00 or 18h00 East Coast US time.  The time can vary, depending upon whether daylight saving time is on or off - but why should the day matter?

It is my contention that the day before a market is to close is the most important day of the trading week.  If you are a position trader, even for just more than one day, a decision must be made if you are to hold the open position until the next trading day.  If you do not have a position, but are interested in a particular trade set-up, how much weight should you give to the time when the market will be closed?

When markets are open, they are free to respond to changing events.  If you cannot be certain if an event is bullish or bearish, the open market will do it for you.  When the market is closed, all traders can do is fret and worry.

The longer the market is closed, the greater is the possibility of some unforeseen "black swan" event that will change the perception of the market's trend.  One of the cliches I find most annoying is "the trend is your friend."  Of course, the trend is your friend until it changes.  Then it catches too many traders leaning the wrong way.  Besides, how do you define the trend?  What can look good on a one hour chart might give you just the opposite read in different time frames.

From personal experience, I can illustrate what can go wrong over a weekend.  For many years I traded grain and soy beans while a member of the Chicago Board of Trade.  During the spring of 1987, it was dry and the speculators got excited and bought many contracts of the spring planted crops.  On a Friday in early June, the weather forecast was for more dry weather , and the market kept working higher as we approached the close of trading at 1:15 p.m.

It had been a nice run.  I had been able to take some money from my account to buy a sleek new sports car the previous week, but I decided it was time  to sell the long corn and soy beans I had owned for over a month.  Then, orders were called to the floor, and runners would take the orders to brokers in the various pits.  It seemed chaotic but it worked.

With less than ten minutes remaining in the trading session I headed to the pits to sell my 19 contracts of soy beans and 60 contracts of corn.  Unfortunately, I never made it to the pit.  At that time I was also a trading adviser for some large Refco traders who wanted advice.  When I got off the phone the markets were closed.

On the following day, a peculiar weather front pushed back from the northeast, over Lake Michigan, delivering heavy rains on the traders in Chicago and the suburbs.  It did not help the crops but it made a terrible mess of my equity.  When the market again began trading on Monday, it did not trade, but instead opened limit down, which touched off more stop loses and compounded the problem.

To this day, I remain reluctant to initiate new trades on a Friday.  Sure, forex is different, as is online trading, but there can be several nasty similarities: ineffective stop losses, margin calls, and negative equities. Here are some suggestions that might assist with protecting your equity.

1.  Always be conservative with the use of leverage.

2.  Stop losses are a very ineffective way to manage your money, especially in a thinly-traded market.  If you end your trading session for the week, comfortable that the stop will protect and preserve your equity, don't be.  In the beginning of trading hours of the week, there may not be many market makers on duty.  This means there can be "slippage " on your fills.  Has anybody ever had their stop loss filled better?

3.  Rather than have an open stop close to the market to protect your position, consider hedging your position.  For example, if you have profited from bear yen move this week and want to hold your long but still have weekend protection, consider hedging your position with off-setting trades.  Keep them both open for the weekend, and consider taking off the hedge when liquidity returns to the market.

Hopefully this might help somewhat in efforts to mind your money.
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