Trading during a US Bank Holiday, such as Memorial Day, is generally not advised due to several key factors related to market dynamics, including low trading volume, wider spreads, and increased volatility across various markets—specifically stocks, forex, and futures. Here’s a detailed explanation with examples:
1. Market Closures and Low Liquidity
- Market Hours: On Memorial Day, major stock exchanges like the NYSE and NASDAQ are closed, meaning there are no opportunities to execute trades during regular hours.
- Forex Market: Although the forex (FX) market remains open 24 hours a day, 5 days a week, key trading centers or sessions (like the US session) may see significantly reduced activity during US holidays, especially if major US economic releases are scheduled or anticipated.
- Futures Markets: US-based futures exchanges such as CME are typically closed or operate with very limited hours during holidays, reducing available liquidity.
- Example: An investor attempting to trade stocks on Memorial Day will find the exchanges closed, unable to buy or sell. Forex traders, despite the market's 24-hour availability, may experience decreased liquidity if US activity diminishes, leading to less efficient price discovery. Futures traders might face limited or halted trading hours, restricting their ability to enter or exit positions.
2. Wider Bid-Ask Spreads
- Spread Dynamics: Low liquidity during holidays causes bid-ask spreads to widen across all markets—stocks, forex, and futures.
- Impact: Wider spreads increase transaction costs. When spreads are larger, traders pay more to enter or exit trades, which can erode profits or amplify losses.
- Example: Under normal conditions, a currency pair like EUR/USD might have a spread of 1 pip. On a holiday with low liquidity, spreads might widen to 3-5 pips or more. Similarly, stock or futures spreads can become significantly inflated, making execution less favorable for traders.
3. Increased Volatility and Gaps
- Volatility Risks: Market gaps—substantial price jumps between closing and opening prices—are more common after the holiday period due to accumulating news or economic reports released during the closure.
- Impact: Gaps can lead to unexpected losses or gains, especially for traders with stop-loss or limit orders.
- Example: A forex position might gap open several pips away from the previous close due to overnight news, creating unfavorable entry or exit prices. Futures markets can experience abrupt gaps that impact traders holding positions open during the holiday.
4. Reduced Market Participation
- Fewer Participants: With many traders and institutional investors on holiday, overall market participation declines.
- Consequences: Reduced participation results in decreased liquidity and can cause erratic price movements, making it difficult to execute trades at desired prices.
- Example: During low participation periods, a trader might attempt to close a position in an FX pair or futures contract and find the bid side unavailable at the expected price, leading to slippage.
Summary
In essence, trading during a US Bank Holiday such as Memorial Day exposes traders to:
- Significantly reduced trading volume across stocks, forex, and futures markets
- Wider bid-ask spreads, increasing transaction costs
- Greater volatility and the risk of sudden price gaps
- Lower liquidity, making trades less predictable and more difficult to execute smoothly
Therefore, it is generally advisable for traders to avoid executing new trades during holidays and wait for regular market hours to ensure more stable, liquid, and predictable trading conditions across all markets.
Join the Sniper Trading Team and take your trading to the next level! Stock Sniper Trading
