Are The Dog Day’s Really That Bad? …Yes
The core of our confidence in trading is a direct result of the back-tests from our methods. I remember telling my partners earlier in the year, after compiling an extensive back-test based on trend trading signals on the Daily charts with the Weekly confirming: “if we can eliminate trading from late June thru late August we’ve got some pretty impressive results”. That statement echoes what many experienced traders will tell you from live market experience. Mid-summer is best left for holiday and family!
I just looked back over the results from our back-tests for this time period for 4 of the major currencies over the last 2 years and counted a total of 13 trades during the dog days with 9 of them losers! Nine out of 13 losers and that period includes the big blow-off in August of ‘08. Now that’s pretty bad, and essentially confirms that low trader participation rates along with low volume lead to markets where the majority of participants have to be there, think market-makers, hedgers and end users, not those that want to be there: professional discretionary traders. Figure 1, a daily chart of GBPUSD from the summer of ‘09 with entry signals marked demonstrates the point.
Figure 1 Getting Whipped in July & August
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The news isn’t all bad though. Often times we see these periods of slower market activity are marked by sideways or directionless trade where price action is dictated not by the higher time frame such as in trending markets, but on the lower time frames as in counter-trending markets. These provide opportunities to demo trade or mini trade these lower time frames using the same higher time frame tactics but in a more compressed time period. The experience of sticking to your trading plan in a live market is always worthwhile!
We won’t be conducting our 3 hour “Live Market Exercise” and Daily Commentary next week, but will resume it on August 3rd.
Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009 and a Trading Instructor at Trading-U.com. To schedule a complimentary, interactive tutorial with Jay on determining market direction and hear more about “Live Market Exercise” go to One on One Tutorial
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments.