Shut Up Shop?

There’s a little town on the north coast of Ireland that I visit regularly. My family have had a holiday home there since I was very young, and I love the place.

In the main street there is a small sweetshop. It’s one of those fantastic old-fashioned places where you can buy sweets from jars by the quarter pound, twisted up in a paper bag.

In the summer, the owner of this sweetshop is run off his feet. The town is busy, full of people enjoying their holiday by the sea.

Relaxed parents are happy to give in to their childrens’ sugary demands - after all, holidays come but once a year!

So the till is ringing, the paper bags stuffed full of sweets are flying out the door and sweetshop man is making money.

All is good.

Winter

Come the dark, dreary months of winter however, it’s a bit of a different story.

Seaside towns are not such an attractive option when the weather is misty, wet and dull. The hordes of people have long since left, preferring to be in the comfort of their own homes, in front of their fires, watching TV and shielding themselves from the elements.

Back on the main street of the seaside town, the sweetshop shutters are firmly down and the door is locked.

Volatility

Below is a chart of FX volatility from Bloomberg. As you can see, it is reaching record lows. For me, this has been an ongoing source of deep concern for my forex trading business, especially over the last few months.

Shut Up Shop Volatility Chart

For traders who rely on market swings and quick movements to make their money, this is a seriously challenging trading environment.

If the market isn’t moving, I don’t make money.

Conditions are not optimal right now for my preferred style of trading, and to suggest otherwise would be to deny the obvious.

But I am not one to stick my head in the sand.  What will set me aside from the crowd will be the manner in which I cope with these conditions.

A Difficult Choice to Make

The sweetshop owner closes up his shop for the winter.

For at least 4 months of the year, perhaps longer.

Does he want to close?

I’m sure he doesn’t.

I’d guess that those lean winter months, with no steady income, are a source of concern for him too.

But what can he do?

Stay open, pay the electricity bills, pay staff, but sell little or no sweets? Lose money just for the sake of staying open?

He can’t wave a magic wand and make the crowds come back. Blind hope is not a business strategy.

He has to play the hand he is dealt as best he can. And when it weighs it all up, it makes most financial sense for him to close the doors and wait until the better trading conditions return.

In the FX markets right now, as the chart above clearly shows, we are in the dead of winter. The outlook really couldn’t be much darker for swing traders.

Should we shut up shop?

Luckily for us traders, we do have an advantage over the sweetshop owner. We are able to observe the market without incurring any significant costs. The sweetshop owner doesn’t have that luxury.

I’m not going to recommend stopping our trading completely. But we need to be aware of the conditions that we are operating in – if the market is moving 20 pips a day, we can’t be behaving as if it is moving 100 pips a day. If the sweetshop owner ran his shop in winter in the same way as he ran it in summer, he would go bust very quickly.

The brighter days of trading will come around again. Volatility can’t go to zero. At least I don’t think it can!

But until the days begin to get longer again and the volatility returns, we have to be extremely smart with our capital and deploy it sparingly.

We need to hunker down and play defensively.

In the dark days of winter, the sweetshop owner has to keep telling himself that when summer rolls around again, the children will be back, wide-eyed at the vast selection of colours, tastes and smells in his sweet jars.

They will demand that their parents stump up the cash for their sugary fix.

Refreshed by the holiday spirit, parents will oblige and the till will ring again.

Until then, it’s a waiting game.