The Christmas Trading Range for Forex

12/23/2009 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

It will probably be a quiet week in the forex markets with many traders having already closed their books and taken off to enjoy the holidays with their families. As a result, everyone has said to expect "thin trading conditions." However, many traders may be wondering what thin trading conditions really mean. By definition, it is an environment where trading activity is particularly light because of the lack of buyers and sellers in the market. This can lead to one of two completely opposite outcomes: Breakout or range.

The reason why breakouts can occur in these conditions is because the lack of buyers or sellers creates a situation where it doesn't take much to trigger a sharp move in the currency. However, the lack of buyers or sellers can also lead to range trading if no one is motivated to take new positions.

Based upon how the EUR/USD and USD/JPY have traded over the past decade during Christmas week, the odds of a breakout this week are low. The following charts compare the trading range during Christmas week in the two currency pairs (red bars) to the average weekly trading range for the past ten years. For the EUR/USD, aside from 2007, the trading range this week tends to be below average. For USD/JPY, the weekly range has also been below average every year except for 2001. In fact, the trading range this week in the forex market tends to be 25 to 50 percent less than the average trading range.

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