66.30 % of retail investors lose their capital when trading CFDs with this provider.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66.30 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to trade during summer? A few tips for the slowest season of the year

Published: 10.06.2024

If you plan to trade in the hot summer months, you should prepare yourself for the market to behave quite differently. Let’s find out what to watch out for and how to trade in this article.

The summer months, specifically June, July, and August, are usually very challenging for traders. Reduced volatility and lower trading activity due to holidays and other aspects make summer a challenging environment in which to trade.

In this article, we will look at the reasons for this seasonal phenomenon and offer practical tips on how to deal with it and potentially profit.

Why is summer the most challenging time for traders?

The main reasons and contexts that characterize summer trading are:
 

  1. Decline in trading activity

    This is reason number 1. This is because during the summer months, especially July and August, many institutional traders in the US and Europe take vacations. This logically leads to a drop in trading volumes. When there are lower volumes on instruments, price action can also be unpredictable, and larger swings can occur, but these are not likely to signal a break in structure or a subsequent change in trend. Rather, they will signal a false break.
     

  2. Low yields

    As the behavior of the big players changes, so do the potential returns during the London or New York session. These will often be lower than usual. As the big players reduce their strategic positions over the summer, volatility, particularly during the London or New York trading session, will be lower than usual. Volatility will then return in full force to the market again in September.

    Data from Bloomberg shows that equities have averaged returns of around 2% during the summer, compared with almost 7% in the winter months. This is vital information not only for stock CFD traders but also for those who like to trade stock indices.
     

  3. High temperatures

    Higher temperatures mean lower demand for some commodities. These then tend to depreciate during this period. Gas is a typical example. In summer, demand for this commodity tends to be lowest because it is not the heating season. The exception, of course, is when global events, such as war, trigger higher demand for gas in order for countries to restock or become independent from an unreliable partner.

    But higher temperatures can also have a psychological impact on traders. The study "Extreme Heat and Stock Market Activity", by Jonathan Peillex and colleagues, examined trading volumes on the French stock market over the period 1995-2019. The results showed that market activity drops significantly when temperatures in Paris exceed 30 °C.

    A potential mechanism leading to these findings is that extreme heat increases fatigue, bad mood, and distraction of traders, which reduces their performance.
     

  4. Traveling

    People like to travel in the summer months and this supports the price of fuel and oil. A related point is that the summer months could be good for commodity currencies such as the Canadian dollar, which is correlated with oil.

    July is also one of the busiest months for tourism in the UK. So this period could be good for the British pound, as the following figure shows us.

    Seasonality of the GBP/USD pair
    Seasonality of the GBP/USD pair, source: cityindex.com

  5. Big summer sports events

    When the World Cup takes place, many traders follow this global event and put trading on the back burner. Volumes therefore drop, especially when attractive matches are being televised.

    This year, the European Football Championships will take place from June 14 to July 14. 2024. The next sporting mega event will be the Summer Olympics in Paris, which take place from July 26 to August 11, 2024. While sports fans will enjoy themselves, traders will have to be more patient during these periods while waiting for the right signal.

    However, if you would still like to trade during major sporting events, be sure to read our article on bizarre trading strategies. In it, you'll find the story of elite American traders who made millions during the 2014 World Cup.
     

  6. US presidential election

    These elections will take place in the autumn of 2024, but even the presidential debates can already indicate a lot and we can expect higher volatility around key dates. The first presidential candidates' debate will take place on 27 June 2024.

    The date of 11 July 2024 also promises drama. That is the date when Republican presidential candidate Donald Trump is expected to go to jail for falsifying accounting records to cover up the $130,000 payout he used to buy the silence of adult film star Stormy Daniels, according to the latest reports.
     

  7. Macroeconomic events

    Of course, there will also be economic news of significant impact reported in the summer, and there will be meetings of several central banks. There will also be a second-quarter earnings season, where the results of large technology companies have great potential for unexpected moves. While there may be higher volatility at these times due to lower volumes, it is less likely to lead to a breakout and trend change.

Learn how to trade gold with our ebook

What affects the price of gold and what is just a myth? What factors to look for when trading this precious metal? Which trading strategy to choose?

So we have explained the main influences, and now the question is how we, as traders, can deal with them so that we can use them appropriately. A few practical tips are useful for this:
 

How to trade during summer? Practical tips for summer trading

  1. Be patient

    As liquidity declines, trades take longer to develop. Therefore, it will take more time for the right signal to occur and then for the trade to develop in that direction.
     

  2. Focus on liquid instruments

    Because there are lower volumes in the market, spreads on some instruments will be slightly wider than usual. This then increases the cost of trading and reduces the profitability of traders. It is therefore advisable to focus on the major currency pairs with the US dollar during this period, where higher volumes and therefore lower spreads can still be expected.

    Fast traders who want to scalp may consider trading the NASDAQ index, DAX and for commodities choose gold for example.
     

  3. Focus on trading "range" strategies

    During the summer, it is advisable to adopt a sideways trading strategy, i.e. a range strategy. Major trends or trend changes are unlikely to occur. Therefore, there is no point in targeting an extremely high risk/reward ratio in the hope that the trend will take off, as these strategies are less likely to succeed during the summer.
    For range strategies, it is possible to use indicators that show the so-called oversold and overbought market. An example of such an indicator is stochastic or our unique Purple Extreme indicator.

    Purple Extreme on the EUR/USD pair
    Purple Extreme on the EUR/USD pair (source: MT4 Purple Trading)


    With the Purple Extreme indicator, it is necessary to understand that when the indicator is in the green zone, it is a signal to enter short only when we have a sideways or downtrend. Conversely, when the indicator is in the red zone, it is a signal to enter long, but only in the case of a sideways or uptrend. The principle applies that in an uptrend it is always preferable to speculate long and in a downtrend to speculate short.

    In the chart above, we have plotted the possible signals that could be traded. We can see that some signals were good, but there are also signals that would not work out. We have marked these with A and B. In trading, these situations occur and should be taken into account.

    When using indicators of this type, it is important to keep in mind that all indicators are always delayed and should be used only as supplementary information that, in the case of Purple Extreme, indicates the existence of a more significant market fluctuation. The advantage is the simplicity of the display, which is especially liked by beginners. However, the indicator does not determine the direction of the trend and also does not show the price level at which to enter, where to place a stop loss, and where to exit.
     

  4. Limit the number of trades

    Reduce the frequency of trading. Instead of, for example, 20 trades per week, it may be more appropriate to reduce the frequency and limit trading to 5 trades per week if you are swing trading.

    If you are trading the scalping method, where you hold trades for a few minutes, then limit the number of trades to five trades for each day. This will allow you to be more selective and minimize the risk of losses during periods of lower liquidity.

  5. Use a daily timeframe

    It is always true that daily and 4H charts are more reliable for swing trading than hourly or minute charts, especially in the summer months. A higher time frame allows you to follow the overall market trend better and the supports and resistances on these frames will be more visible and also stronger. After all, levels from daily charts can also be used by scalpers who will be looking for quick trades on them.
     

  6. Focus on one strategy

    Focusing on one strategy when trading during the summer months means you won't be distracted by trying to find many different trading setups. Again, less is more. Knowing how to use one strategy perfectly is often much better than trying to combine different and especially untested strategies.
     

  7. If you scalp, trade only one instrument at a time

    When applying a strategy where the average trade time is only a few seconds or minutes, it is important not to trade more than one instrument at a time. This will help you to avoid mistakes and losses caused by overtrading and fatigue, which come faster than usual in the summer months.
     

  8. Stop trading after 11:30 a.m.

    Momentum in Forex tends to be strongest during the first two hours after the market opens. Therefore, you should not make trades after 11:30 am. Instead, you should use the time to evaluate the morning session and analyze your trades. If you do not have time in the morning, an alternative is to trade from 3:30 to 5:30 p.m., after the U.S. session opens.
     

  9. Do not trade during the premarket

    Premarket sessions usually have poor liquidity, especially in the summer, which often results in wider spreads and slower execution. Remember, if you like yourself, the last thing you want to do is start your day by already losing some money after making a trade during the premarket. This can have an emotional impact on your ability to find the best opportunity when the normal trading session begins.
     

  10. Use only the best "setups"

    It is advisable to classify your trade entry setups (i.e. signals according to your trading plan) into A, B, and C categories, where A will be those signals that meet 100% of all entry criteria and that give a risk/reward ratio of at least 1:2. Waiting for these best opportunities will reduce the number of trades as a side effect, so you will avoid overtrading.

     

  11. Don't trade from the beach

    Advertisements entice you to trade from the beach. Avoid this as it is totally inappropriate. Not only will you not see anything on your monitor, but sitting in front of your computer under the sun is definitely not going to help your head, your computer, and most importantly, your account.

    If you want to treat trading as a special kind of job, remember that every normal job comes with a vacation. So allow yourself the luxury of going on vacation without a computer.

In addition to the above recommendations, other important principles also apply in summer, such as the emphasis on proper diet and hydration, but also quality sleep. Extreme temperatures can drain the energy out of a trader very quickly. This increases his susceptibility to mistakes and not following the trading plan, which costs him a lot of money unnecessarily.

66.30 % of retail investors lose their capital when trading CFDs with this provider.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66.30 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.