As the markets are open across different regions around the globe, they can see a great deal of volatility and movement based on all manner of different factors.
Although there are different hours of the day and even days of the week that are optimal for certain types of trading, it is also worth discussing the different times of the year and how trading conditions can vary.
It is generally agreed upon that the three worst months of the year to trade are the summer months. This means that June, July, and especially August are probably the worst times of the year to trade.
Why is Summer Trading the Worst?
Summer trading tends to be the worst trading of the year due to the fact that these months represent a vacation period for most people.
A vacation period generally means that trading volume may decrease significantly, creating what can only be described as a drought of sorts.
S&P consistently provides research data which shows that the months of June, July, and August provide the weakest returns for most markets throughout Europe.
There is a phrase commonly used on London trading floors, “Sell in May and go away,” and the lack of trading volume throughout the summer months is the reason for this.
Selling in May means that you may return and reinvest in the market once the summer has finished and volatility has returned to normal.
Historical data validates this approach:
- August 2011 saw the S&P 500 fall 10%.
- August 2010 saw the S&P 500 fall 4.5%.
- August 2008 saw the S&P 500 rise a meagre 1% before taking a serious downturn
So if the summer months are the worst times of the year for profitable trading then when exactly might you begin reinvesting in the markets?
Rising Profits in the Fall
Autumn moving into the winter months generally tends to be a great time of year for trading because this is when the markets see a healthy rebound from the trading volume “drought” often seen through the summer.
The only exception to this rule is the second half of December, where the Christmas season creates a number vacation period, albeit shorter than that of the summer.
From September through until December many investors are reinvesting back into their holdings, creating far more trading volume and greater overall investment opportunities.
Winter moving into the spring is also considered a fairly good time of year to trade; however, if you are going to follow the London rule we discussed above then it may be better making sure you are prepared to sell off your holdings by the time April or May roll around.
This approach to seasonal trading may enable you to maximise your profits during times of high volume while minimizing potential losses during stagnant vacation or “drought” periods.
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