How to Trade Thin Holiday Markets
The markets took a pause ahead of Hanukkah and Christmas, hovering near all-time highs. The thin volume and uncertainty of the holiday season can bring advantages for Nadex traders.
By Vikram Rangala
Tuesday, December 27, 2016 - 00:00
The recent terrorist attacks in Berlin, Zurich, and Ankara don't seem to have dampened end-of-year trading, but a range of uncertainties mean that some investors are cashing in and reducing their risk exposure.
While the political world showed a volatile reaction to these attacks, markets around the world noted them but remained within a rally's range of all-time highs. The post-election rally has added trillions to the value of American equities since a sharp decline in early 2016, lifting the US dollar to a multi-year high.
US markets hit new records in the middle of December, with the Nikkei, DAX, and Stoxx indexes all following suit a week later. Since then, the Santa Claus rally has given way to the also-traditional holiday lull. In 2016, the first day of Hanukkah coincided with Christmas Eve, making traders even more likely to take the long weekend and even the rest of the year off.
While it's difficult to tell for sure, some anecdotal evidence exists to suggest that the thinner trading volume in most markets is dominated by algorithmic trading programs. Proprietary desk traders at investment banks and hedge funds are more likely to be on holiday, especially given the huge rebound stocks made after the drop in the first quarter of 2016. Twitter feeds tend to have more holiday pics and check-ins and fewer calls about market direction or retweets of news stories.
Since algorithmic trading accounts for 60 to 70% of volume even during normal trading periods, it's easy to see how the thin, flat price action we're seeing might be dominated by computer programs. The main goal for those programs right now, according to many analysts, is cashing in on a profitable year.
“It makes total sense to take some money off the table,” Mohamed El-Erian, the chief economic adviser at Allianz SE, told Bloomberg TV last Tuesday. “We’ve priced in no policy mistakes. We’ve priced in no market accidents, and we’ve ignored all sorts of political issues."
Binary options offer a unique advantage in sideways markets. Because they offer all-or-nothing payouts based on a single strike price, a market only needs to be a short distance above or below your strike price at expiration for you to receive the full $100 payout.
That means that a trade that might have yielded only a few ticks of profit in conventional futures or forex can offer higher leverage returns if you use binary options on the same underlying market.
At the same time, if the market fails to move as you expect, you still have the protection of guaranteed limited risk on every trade. So if you do trade over the holidays, give yourself the gift of limited risk protection combined with the exceptional flat-market leverage of Nadex binary options and spreads.
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