Should You Trade Forex During Christmas and New Year?

Trading during holidays can be risky due to lower liquidity, wider spreads, and increased volatility. However, reduced market noise can also provide clear short-term trends. 

In this article, we will discuss the impact of holiday trading and whether traders should consider it. 

Is the forex market open during holidays?

The NYSE and NASDAQ are closed on Christmas Day (December 25th) and New Year's Day (January 1st), and most other exchanges are also closed on these days. All markets are open per their normal trading hours between Christmas and New Year's, except for December 31st.

Impact of trading during holidays 

Low liquidity

During holidays, fewer traders and investors participate in the market, leading to reduced liquidity. This means fewer long and short orders make it difficult to execute large trades without causing significant price changes. Lower trading volumes can also result in less market depth.

Wider spreads

The difference between the highest bid price and the lowest ask price widens with fewer market participants. This increases transaction costs, as traders will need to pay more to enter or exit positions. Wider spreads can also reduce potential gains by requiring better price movement to break even.

Market gaps

Reduced trading activity during holidays can lead to price discontinuities or gaps between the closing price of one session and the opening price of the next. These gaps can introduce volatility, as the market may react unpredictably when it resumes trading, leading to sudden price movements.

Consolidating market

With lower trading volumes, price movement tends to slow down, leading to a consolidating market where prices move within a narrow range. This makes it difficult for traders to identify clear trends or momentum, and trend-following strategies may become less effective during such periods.

Economic data delays 

Important economic data releases, which influence market sentiment, may be delayed or postponed during holidays. This can lead to uncertainty, as traders are left without proper information to guide their decisions. A lack of timely data can cause price fluctuations when it eventually becomes available.

Lower hedge fund activity

Many hedge funds and institutional investors scale back their activity during holidays, reducing their market presence. This decreases overall market liquidity, which can lead to more erratic price movements, as there are fewer large-volume participants to absorb trades.

End-of-year rebalancing

Institutional investors often rebalance their portfolios toward the end of the year, trading large amounts of assets to adjust their allocations for the upcoming year. This can cause increased market volatility, especially in the days leading up to the new year, as large trades are executed to finalize year-end adjustments.

Reduced market predictability

With fewer traders and less activity, the market can behave unpredictably. Typically, price patterns that may form during regular market hours may become harder to detect during holidays. This reduced predictability increases the difficulty of making accurate forecasts and can lead to increased risk in trading strategies.

Impact on currency pairs linked to commodities

Commodity-linked currencies, such as the Australian Dollar (AUD), Canadian Dollar (CAD), or Norwegian Krone (NOK), can be particularly sensitive to price movements in commodities like oil, gold, and natural gas. During holidays, if there is a significant price change in these commodities, the related currencies can experience increased volatility, which may present both risks and opportunities for traders.

Risk for uninformed traders

Because the market is unpredictable during holidays, traders who are not well-prepared or informed may face higher risks. Fewer resources, such as timely news or analysis, combined with reduced market liquidity, can lead to poor decision-making and losses for those who fail to manage risk appropriately.

Potential for short-term trading opportunities

For some traders, the holidays can create short-term trading opportunities due to the volatility and large price moves caused by geopolitical events, unexpected news, or economic reports. While these opportunities may come with increased risk, skilled traders can capitalize on these moves if they can manage the volatility.

Benefits and risks of trading during holidays

Benefits

• Lower competition: With fewer traders active during holidays, there is less competition in the market. This can create opportunities for more focused trades, as there are fewer orders to absorb, making it easier to identify and capitalize on price movements

• Potential for big moves: During holiday periods, major economic news or geopolitical events can have a heightened impact, causing significant market volatility. With fewer participants in the market, these events may result in more pronounced moves, offering the potential for larger gains if traders are able to react quickly to these changes

• Less market noise: Reduced holiday trading activity leads to less market noise, often resulting from high-frequency trading or small, insignificant movements. With fewer trades, it becomes easier for traders to spot emerging trends or patterns without the distraction of constant fluctuations

Risks

• Illiquid currency pairs: During holidays, liquidity in certain currency pairs, especially those less commonly traded, can significantly decrease. This results in wider bid-ask spreads, slippage, and challenges in executing trades at desired prices. Traders may find it difficult to enter or exit positions at favorable rates, increasing trading costs and risks

• Emotional impact: Trading during the holiday season can be emotionally taxing. Monitoring the market constantly and making quick decisions can heighten stress, leading to impulsive choices. These emotional pressures can result in rash decisions, excessive risk-taking, and, ultimately, a higher potential for losses

• Overtrading risk: The temptation to capitalize on the potential for big moves during holidays may lead to overtrading. Traders might increase their positions, betting on volatility without fully considering the risks involved. This can result in excessive exposure, leading to  losses if the market moves against them 

Holiday trading: the verdict

Forex trading during holidays reduces market volatility. However, the lower liquidity increases transaction costs and risk. Traders should consider the potential rewards and risks before trading forex during holidays. If they have a higher risk tolerance, they can trade during the holidays. However, if the trader lacks deep market knowledge, holiday trading should be avoided.