High volatility will add sizzle to your summer trading

DURING the summer months, the stock markets, like everything else, quieten down in July and August as people head off on holiday and companies scale back their activity. The result is noticeably lighter trading volumes and relative illiquidity in the markets. <br /><br />As a spread better, you might therefore be inclined to take a break like everyone else and start trading again in the autumn. <br /><br />But if you are stuck in the UK over the summer and want to keep up your trading, then the summer months still offer you plenty of opportunities and you shouldn&rsquo;t be discouraged from playing the market just because volumes are down and professional traders are disappearing. <br /><strong><br />HIGHER VOLATILITY</strong><br />If you&rsquo;re a day trader and wondering where all the volatility has gone lately, then you should be rubbing your hands with glee at the prospect of quieter trading. Lower trading volumes typically mean higher market volatility because prices are much more susceptible to gapping, meaning that moves can be much sharper than they would be in times of high liquidity and you&rsquo;ll therefore see greater cumulative points moves.<br /><br />However, bear in mind that you need to be watching your positions closely or have your stops set at levels you feel comfortable with. If the market moves against you, then it could do so by a significant margin. Also, with relatively illiquid markets, you may want to consider using guaranteed stops as these will honour your stop-loss level even if the market gaps over it. You will pay for this in terms of wider spreads so you need to decide if the risk is worth it. <br /><br />The slightly longer-term spread better holding on to positions for several days must remember that the lower volumes can mean that market moves are not always representative of the true value of the asset, says Angus Campbell, head of sales at Capital Spreads.<br /><strong><br />LIGHTER VOLUMES<br /></strong>That said, while markets might be volatile on a day-to-day basis, the lighter volumes combined with the fact that many senior traders are away on holiday, leaving more junior traders behind, mean that markets can stay range-bound over the summer months, with no one particularly wanting to force a direction. The current uncertainty over the economic climate also means that traders, particularly in the foreign exchange markets, are being cautious and defensive in their trading strategies. <br /><br />Ian Horsley, trader at Spreadex, says: &ldquo;Certain markets are in clear trading ranges and clients can trade regularly within those levels and build up their trading reserves quite nicely, but have to be prepared to cut when the price breaks out of the range they identified.&rdquo;<br /><br />He adds: &ldquo;Some customers have been looking at Rio Tinto, which is stuck in a bit of a trading range between &pound;18 and &pound;22 a share, while others have been selling Barclays because at the current price of 319p it is approaching a double top &ndash; the previous high this year was 322.25p.<br /><br />The FTSE 100 itself has been trading fairly consistently between 4,200 and 4,500 since early May, and may yet continue to trade sideways within this range over the summer months, although optimistic investors are hoping that an upbeat second quarter earnings season could push the blue-chip index firmly upwards. <br /><br />Alternatively &ndash; and less positively &ndash; a disappointing set of results could see the FTSE heading lower. With market expectations riding high in the wake of a better-than-expected first quarter, this is not a remote possibility.<br /><br />Horsley also expects crude oil and sterling-dollar (cable) to remain volatile within their respective ranges of $1.60 to $1.65 and $60 to $68-75. He says these are both popular summer markets among Spreadex clients.<br /><strong><br />INVESTOR UNCERTAINTY<br /></strong>However, given the turbulence of the past year and both the economic and political consequences of the recession adding to investor uncertainty, then this summer may prove to be less quiet than usual, and certainly more volatile than we experienced in the pre-financial crisis years.<br /><br />Any shock event &ndash; whether it be the Bank of England extending quantitative easing, a credit downgrade for the UK in light of the unsustainable fiscal position or a series of writedowns by Eurozone banks &ndash; could stir up market activity ahead of time. <br /><br />If you&rsquo;re one of the few still trading, then you will be placed to take serious advantage. Who needs the beach?