Tuesday, December 1, 2009

December is Here... :-)

Today is a very special day, December 01. The end of the year begins, Christmas comes and the forex market starts to change into a very "untradable" and difficult beast. What is so special about December and why do most people avoid this month for trading ? Why is it that trading systems generally accumulate more loses in December ? Today I wanted to write a post dedicated to this wonderful month that on top of bringing us happiness and joy (my anniversary is in December :)), brings us a lot of confusion and problems in trading. Through this post I will try to explain the general characteristics of December and why we should avoid trading it or not.

What is so special about December in the first place ? (Besides snowmen, Santa and Saturnalia) Well, December is the last month of the year and as such many traders and institutions, specially large ones, need to close their positions in order to close their books and pay their taxes. This is not only true in the US but in many other countries around the world in which tax paying, balances, profit targets, and other important business needs to be carried out at the end of the year. What does this mean for us the poor mortals ?

December and January usually mean that the big boys will be taking their profits and closing their year long positions. Hedge fund managers, banking institutions, investment funds will start to close their profitable positions, not only in currency pairs but in other assets which may generate exchanges that may significantly affect currency exchange rates. Last year for example, there was massive profit taking in Dec/Jan from the very fast downtrend we saw because of the economic crisis on the EUR/USD. Such a retracement, which moved the market nearly 1000 pips in two weeks proved to be bad for many traders which tried to sell the retracement thinking that a down trend was still in place.

December also means low liquidity. This is mainly for two reasons. First, no one wants to take positions at the end of the year in the big institutions and central banks and second of all, everyone is on holiday and most people who trade will not be trading the markets. What does low liquidity mean ? Deviations from technical analysis. Probably export/import exchanges and profit taking take much more importance in December and non speculative moves which are inherent to the market may start to play an important role. The tendencies you have seen for most of the year can disappear and your technical analysis can betray you. This is the reason why many people avoid December trading. Because the beast becomes unpredictable (even more so !) and many times the usual trading tactics stop working.

Does this mean you should not trade in December ? well, certainly you can trade in December. For example, there are some automated trading systems that in fact accumulate more profits in December because of the directional counter trends and there are some people who know how the market behaves during this month and can take benefit from it. My advice is simple, be careful with December and January. The first time you face these months don't trade them, observe them and see how they deviate from what you would have considered normal. Would you have been able to profit ? Why do you think the movements happened ?

My invitation, analyze this December and we will write some conclusions in early January. I for one will trade this December with my S&R system, we'll see if I am able to get good results out of this month. Of course, all automated trading system will trade it, since they are all 10 year long profitable there is no fear for the month of Santa :). If you would like to learn more about long term profitable automated trading systems please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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