Why More Isn’t Always Better: The Case for Fewer Trading Days in a Year

Trading – When you’re first getting started with trading, you might think that more days to trade on the markets is better than fewer. After all, it means that there are more opportunities to make money, right? Unfortunately, the reality of the situation isn’t quite as straightforward as that.

December 4, 2010– Traders of stocks, bonds and other securities on U.S. exchanges operated by the NYSE Arca will now be able to trade more frequently during nine months of the year, according to the Wall Street Journal. The new trading schedule is intended to make it easier and more cost effective for institutional traders who specialize in low-volume stocks that are difficult to trade when they have fewer trading days in a year. Over time however, as trading volumes grow and spreads tighten, this may lead traders toward larger issues with more liquidity. 

Allowing institutional traders greater flexibility to match trades is likely to increase volatility levels among these stocks which are often considered less liquid than their peers. It may also prompt some investors to focus exclusively on more liquid stocks due to lower transaction costs. In any case, with so many potential consequences, one thing is certain: there’s no telling what impact the change could have over time. What might happen if there were only six trading days? That would leave an entire month without any price fluctuation whatsoever. No doubt the latter scenario would mean dramatically reduced trading volume for those stocks that now experience high fluctuations within shorter periods of time. So far it’s unclear whether such a radical shift in the market calendar would result in higher or lower average daily share prices. If anything, though, we know this much: more isn’t always better.

In these types of volatile markets, it’s important to get the best bang for your buck. This can be done by minimizing trading days in a year as much as possible. Trading fewer days will allow you to concentrate your efforts on trading during the most profitable times, while limiting losses incurred when trading during less profitable times. Whether you’re an individual or institutional investor, it is important to find the balance between maximizing gains and minimizing losses. Trading fewer days per year is an easy way to do this. When you trade four days per week, there are only 52 weeks in a year that your trades are open – not counting holidays. With five days per week, there are only 60 weeks in a year that your trades are open – again not counting holidays. So if you were to trade Monday through Friday each week with four-day intervals, you would only need 144 months worth of capital. Trading every weekday with five-day intervals would require 180 months worth of capital because there would be six trading sessions every month. Again, not including holidays! If you have $5 million USD, trading one day a week with four-day intervals would leave you about $1 million USD at the end of 24 months without any transactions. But trading three days per week with five-day intervals could leave you close to zero after 24 months without any transactions due to all the trading commissions and other charges taken out during those two extra periods. And what happens when there’s something going on in the market? We’ve all been taught how volatility is directly proportional to risk; so having more days means more volatility which equals more risk.

While trading days are a personal preference, the number of trading days in a year has implications for investors. There are many studies that conclude that investors have lower returns during periods with more trading. One study found that stocks have historically shown higher volatility on the first day of trading after time off, which may be due to pent up demand. Another study concluded that stocks tend to react negatively on the last day of trading before holidays and show positive performance on the first day of trading after holidays. This is attributed to employees being preoccupied with planning their holiday party or getting home early and not focusing as much on investing. These studies suggest that less could potentially be more and there is no one-size-fits all approach. Investors should carefully consider how they want to divide their time between stock picking and market timing strategies when making these decisions. We’ve learned that stocks typically don’t perform well on the last trading day before a long break and then post good gains on the first day back in action. But what about markets? If you are looking at just an individual stock’s performance, it can seem like it doesn’t matter if it is open or closed, but markets behave differently than individual companies. Markets do well during regular hours but underperform in extended hours sessions, showing greater volatility around certain events such as elections or natural disasters. When analyzing markets it’s important to compare them using times when everyone is invested; i.e., from 9 am until 4 pm EST Monday through Friday.