Monday, August 16, 2010

To Trade or Not to Trade : A Little Bit About Friday Trading

Can I disable Friday trading ? This is perhaps one of the most common questions I hear from people who try automated trading systems. Certainly the reason why most people are concerned with Friday trading can be easily understood but when you really look into the evidence people have to avoid trading this day of the week you will find that - for most systems - it is nothing more than a senseless superstition. What is so wrong and different about Fridays ? Should you avoid or not avoid Friday trading ? On today's post I will try to address these questions. I will first explore the reasons why traders avoid Friday trading and what the evidence actually says about trading the last day of the week, after that I will give you my conclusions about Friday trading and what you should do in order to know if you should or should not avoid trading Fridays.

What is the problem with Friday ? There are many reasons traders - especially new ones - give when you ask them why they are so reluctant to trade on Fridays. The first and most valid of these reasons is carrying positions over the weekend. Since traders know that getting a position through the weekend involves the risk of facing an unfavorable gap, they will attempt to avoid the carrying of positions in order to preserve their capital and avoid worse than stop loss trades. It is no mystery that if the market moves against you on a weekend and open up beyond your SL your broker will close your position at the next available price level which is - probably - much worse than your SL.
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Of course, the possibility of disaster changes depending on the trading strategy you are using. Systems that use 100-200 pip stops with a 1-2% risk will almost never lose a significantly large amount of money on a weekend gap (for systems like this the worst case I have found has been a 3-4% loss, just about two losing trades worth) while strategies that take huge risks on tight stops would run the risk of wiping the account on a large gap. For example, if you are trading a system with a 10 pip stop risking 10% (yes, there are systems that trade such an unsound money management) leaving a trade opened through the weekend is suicidal as a moderately large gap of 100 pips will wipe you out and an even larger gap of 200 pips can leave you owing money to your broker (yes, this is possible but I will discuss it on a later post).

The truth is that for all the systems I have tested that use sound trading tactics the largest loses due to weekend gaps have not surpassed a 3 consecutive loss count. It is also worth mentioning that the opposite effect (being on the right side of the gap) also happens with roughly the same frequency so in the end (over a long period of time) the effect of leaving trades over the weekend for these systems is almost the same as leaving trades open during any other day of the week.

Then we also have the fact that none of the systems I have ever tested and found reliable take any benefit from removing Friday trading. As a matter of fact- since Friday contains NFP releases and some other important news events- removing trading for this day of the week causes all the systems to lose a good part of their profitability, causing their net profits to go down and -even worse- damaging the average compounded yearly profit to maximum draw down ratio. Many important trending movements seem to begin on Fridays - with news as the catalyst- and for this reason removing Friday trading has never shown to bring positive consequences for any of the systems I trade.

In the end it seems that the removal of Friday from trading is more of an irrational fear caused by the psychological impact and "probable loss" from gaps than a good practice based on statistical evidence. When using systems that have sound trading tactics and modestly large SL and TP targets it has been evident that removing Friday trading has only detrimental effects on their long term performance. Of course if you would like to learn more about the development of sound trading systems and how you too can use, design and program your own systems based on realistic profit and risk expectations please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)

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