Rollover, Weekend Gaps and Holiday Liquidity (part 4)

Most of the week, the currency market is deep and orderly. A few moments are not. The daily rollover, the weekend close and public holidays each thin the market or close it, and each can move a price in ways that have nothing to do with the chart. Knowing when they happen is the first defence.

The daily rollover

Once a day, usually at the New York close, positions roll into the next trading day and the swap is applied. For a few minutes around this moment, liquidity drops and spreads can widen sharply, sometimes to many times their normal width. Stops placed close to the price can be triggered by the spread alone. Scalpers avoid this window; swing traders should make sure their stops are not within spread-widening distance at the time.

The swap itself is the interest difference between the two currencies for the day. On one midweek day most brokers apply three days of swap to account for the weekend, which matters for anyone holding a position with a large negative swap.

The weekend gap

The market closes on Friday evening and reopens on Sunday evening. Anything that happens in between is priced in a single jump at the open. Most weeks the gap is small. Occasionally, after a political event or a major announcement, it is large enough to pass through a stop and fill it far from the intended level. A stop is not a promise of a fill at that price; it is an instruction to exit at the next available price.

Options for handling weekend risk:

• Close positions before the Friday close, which costs the chance of a favourable gap
• Reduce size on Friday so that an adverse gap is survivable
• Hold only positions where the stop is far enough away that an ordinary gap would not reach it

Holidays

A holiday in one major centre leaves the market open but thin. Ranges shrink, moves become erratic, and stops get hit by spikes that would not happen on a normal day. The most dangerous are the days when one centre is closed and another releases data, because the reaction has fewer participants to absorb it.

Building the habits

Mark the rollover time, the weekly close and the holiday calendar on your chart. Review open positions on Friday afternoon with the gap in mind. Keep stops away from the rollover window.

What to watch

Watch the spread around the rollover on your pairs, the size of recent weekend gaps, and the holiday calendar for the main financial centres. A weekend before a scheduled political event deserves a smaller book.