Many financial markets have interesting features known only to experienced investors and traders. Naturally, this allows them to be prepared for market conditions changes and, consequently, to achieve higher returns. One of such peculiarities of the stock market is the decline in activity during the summer. So, how to trade effectively during the summer months?
From this article you will learn:
- During the summer months, trading volumes typically decrease due to reduced market activity and increased vacation periods.
- Traders should adjust their strategies to accommodate lower volatility and potential market slowdowns during the summer season.
- Employing risk management techniques and staying disciplined in trading practices can help traders navigate the challenges and capitalize on opportunities presented by the summer trading period.
Stock Market in the Summer
There is accumulated evidence over many years that the six months from November to April (inclusive) are the best period for trading stocks throughout the year. By many indicators, it outperforms the period from the beginning of May to the end of October in many countries. Over the three hundred years of British stock exchange history, this phenomenon has become so common that it has even acquired its own name – the Halloween indicator or the “Sell in May and go away” rule.
Among the reasons why this rule has been working for many years are:
- Reduction in the number of active traders in the market during the summer months. Some attribute this to the onset of the holiday season (not only among market participants, but also among the personnel of issuer companies, which somewhat reduces activity in the business sphere), while others say that this happens because of the emerging habit to follow the aforementioned rule. Those thinking more broadly consider that several reasons are at work, turning the rule into a self-fulfilling prophecy.
- Key moments in companies’ activities. These traditionally include the end and the beginning of the year, when issuers report on the completion of another cycle, the fulfillment of annual plans, and the achieved results. It is also when plans and expectations for the next year are announced, and the first months demonstrate how realistic they are. As a result, market participants have more news and fundamental reasons to conduct transactions with various securities, which, of course, stimulates activity in the market.
The result of such cyclical activity in the market is a significant change in profitability. Bloomberg, which has seriously studied this issue over a long historical interval and in markets of many countries, asserts that the difference in indicators is quite substantial. For the US stock market, the agency talks about average return figures of 2% in the summer and 7% in the winter months. Moreover, statistically, the probability of making a large profit increases – more than 60% of the most profitable deals occur precisely during the six-month period from November to April.
However, investors in the market need to understand that these figures correlate very weakly with the individual annual cycle of individual stocks. They are mainly true for broad market indices and exchange-traded funds working with them.
Rules of Summer Trading
The discussed peculiarity of the stock market dictates the need for traders to be more selective during summer trading. In the summer months, the first task for market participants is to avoid losses when there is a decrease in market liquidity and volatility.
Those who have been trading in such conditions for years have long developed several simple but important rules that are recommended to follow in everyday summer trading activities:
- Focus on one strategy. Typically, the market is less volatile in the summer, so there is no need for frequent strategy changes, even for intraday traders. However, concentrating on one strategy will allow standardizing approaches to all selected assets for trading, eliminating the need to apply various methods of price chart analysis. As a result, the trader’s work becomes simpler and more effective, allowing them to maximize profits in a calm market.
- Limit the number of assets for simultaneous or closely spaced trades. Liquidity in the summer market is reduced, so making qualitative analyses to choose the right entry or exit points requires more time. Trying to buy/sell stocks of different issuers simultaneously inevitably increases the likelihood of making mistakes, the cost of which could be real losses. It is quite challenging to work them out in a calm market.
- Carefully plan the trading day. In the summer, the daily trading cycle in the market also significantly differs from winter. Typically, peak activity occurs in the first few hours after the session opens. This period should be considered optimal for making trades. By evening, liquidity further decreases, which dictates special caution for the trader when choosing an entry point. Some experienced market participants advise abandoning trading altogether in the second half of the session and dedicating this time to learning, analyzing their own trades, and other useful activities.
- Avoid trading in the pre-market. If in the winter months this time can provide very successful entries, then in the summer, when liquidity decreases significantly, every pre-market trade becomes a source of excessive risks. Moreover, widened spreads due to lack of liquidity will significantly increase trading costs.
- Use only high-quality signals. Of course, a sluggish market and low liquidity create significant psychological pressure on the trader. However, it is precisely because of such market behavior that one should control their emotions, refrain from making spontaneous trades, which are likely to result in negative outcomes. Only high-quality signals an
Factors to Pay Special Attention to
During the summer, triggers that initiate various market events and catalysts that fuel market sentiment become particularly important, just as much as they do during the winter months. However, due to the sluggishness of the market, it is essential to prepare particularly carefully for their appearance because, in low liquidity conditions, they can provoke powerful price movements. Events that require special attention during summer trading typically include:
- Company earnings reports. Traders and investors always analyze the quarterly reports of issuers very carefully. During the summer, however, the results for the first half of the year are summed up, which can be an even greater incentive for market movements.
- Management changes. Such news always triggers strong movements in the quotes of specific securities. In the summer period of reduced liquidity, the impact of such news can be catastrophic. A powerful price impulse, associated, for example, with the departure of an effective top manager or the dismissal of an ineffective one, can lead to unpredictable developments, up to short or long squeezes.
- Mergers and acquisitions. From the standpoint of company owners and management, summer is no worse than winter for concluding such deals. For traders who want to make a good profit or avoid losing a significant portion of their capital, it is essential to carefully monitor the publications of such news. Typically, even in an active winter market, they cause a surge in volatility, but on a sluggish summer market, it is guaranteed to be 100%.
- Publications on social media. Although activity in investment-related discussions in public forums may decrease slightly during the summer, tracking publications appearing there will still be useful. Today, social networks can influence virtually any process, and examples of their use for market event management, such as GameStop and AML, are excellent illustrations.
Overall, although the summer stock market is considered less active and profitable than the winter market, a trader can still find an opportunity to make a substantial profit on it. To do this, one should carefully select assets for analysis and adhere to some simple trading rules.