Transitioning to Summer Market Trading – What to Expect

In today’s episode, we are going to be discussing how traders can prepare for the transition to summer trading. When we say summer trading, we’re referring to low volatility market conditions with tight ranges and choppy price action.  These are the types of environments that challenge traders of all experiences and both George and I would agree that it is a lot more difficult to transition from a volatile market to a slower market than vice versa. We’ll talk about how you can prepare for the transition to summer volatility and some rules that you can implement into your trading plan to give yourself the best shot at success!  There is an old industry adage that used to be thrown around along the lines of “Sell in May and Go Away”. In fact, from 1950 - 2013, the Dow Jones posted lower returns from the May to October period compared to November through April - which gave further merit to this saying - however, it's worth noting that this trend has somewhat changed since 2013! Advances in technology over recent years have provided traders with instant access to the global markets, leading some to believe that the old "Sell in May and Go Away" adage is no longer relevant - however - in our experience, there is still some truth behind this saying.  So What Causes Lack of Volatility in the Summer? 

• When do you typically go on vacation? Institutional money managers and decision-makers will be doing the same! 
• A lack of market participants means that volume tends to dry up, ranges will narrow and volume can decrease due to low liquidity conditions 
• There are typically less high-impact economic releases scheduled in the summer months 
• High-Frequency Traders (HFT) are more active during these low liquidity periods which can cause price movements on low volume 
• HFT business model involves capturing profit on micro-movements day over day so they will be on and firing during the summer months 

Impact of Summer Doldrums 

• Slow markets tend to have a negative impact on trader’s psychology 
• Traders can be tempted to trade more aggressively due to lack of market movement 
• Especially if they have a profit goal they are trying to achieve 
• This can result in some nonsensical price action that leads to frustrating trading experiences and getting stopped out due to low liquidity. 
• Low volatility = poor price action = minimal trading opportunities

What do you need to do to adjust for summer volatility?  You have two choices: 

1.  Decide to take the time off 
2. Continue trading during the summer months 

Option #1: If you decide that you want to avoid the summer doldrum altogether, then it might be good to take a break from trading and do something else!  This could be a great time to enhance your knowledge of the markets, review your trading journal and refine your strategy, back-test your strategy, and build up a data set of information.  Option #2: If you decide that you want to continue trading into the summer months, then you will have to make some adjustments to your trading plan in order to accommodate for the lower volatility.  We’ve put together a list of four rules that can help you out if you plan on taking this route:  The four GOLDEN rules of summer trading 

1. Increase patience for entries - since there is more consolidation during summer months, moves often take longer to develop and you will likely be in your trades for longer periods of time 
2. Reduce total daily trades - With lower volatility, you will want higher quality setups over quantity; 
3. Reduce overall trading size - Summer is a time that will test your risk tolerance, so we would recommend reducing your trading size and number of open trades at any given time. This will help prevent you from making emotional decisions because of multiple positions in low volatility 
4. Get paid quicker, less patience on runners - As we mentioned earlier, the markets tend to consolidate a lot more during summer months, which means that directional movements are often rapid and short-lived, followed by more consolidation and range contraction. It’s a great idea to get paid quicker in these environments and to be a lot less patient with your runners as they often reverse before trading into extended take profits. 

Some Things We Also Discuss in Today's Show: 

• "Sell in May and Go Away" - is this still relevant today?  03:58
• Why summer markets tend to lack volatility 08:37
• How slower markets tend to challenge new traders 15:45
• Why keeping the same daily profit target for summer months can negatively affect your psychology  16:45
• How market movements tend to be more rapid and short-lived these days 19:45
• How to stay sharp if you plan to take the summer months off from trading 21:48
• What traders can learn from elite athletes and how they train in the off-season 24:05
• Why working on the "internal operator" in the off-season will make you a better trader 27:35
• Why you have to increase your patience for entries in summer markets 30:40
• Is it better to start your day trading career during high or low volatility market conditions? 33:40
• Reducing total daily trades in order to stick with the highest quality setups 35:45
• Reducing your position size to limit risk exposure 38:18
• Why the idea of consistency is unfounded in this industry 41:04
• Why you should get paid quicker and be less patient with runners in summer markets 42:50
• Adjusting your trading brackets for summer trading 44:50
• Patience pays - you will often get a second chance in summer markets 46:35
• How momentum traders can adapt for summer market conditions 49:47
• Tips for new traders looking to trade through their first summer market 53:15
• Why screentime is your best friend as a new trader 56:00

Resources

• Connect with our community online: Trade Pro Academy
• Catch up with our earlier episodes: Mind Over Markets Podcast