Although most people trade during the London and New York market sessions, the Shanghai Stock Exchange is also crucial to the global trading sphere. As the peak trading period of the second-largest world economy, major developments during this period matter to people globally.
When the stock market in Shanghai closes or goes on a break, it is a major event that changes how the rest of the world trades. It affects price movements in ways that can make your trading strategy less effective.
Many professional traders adjust their game plan during this period. While some may drastically reduce their risk per trade, others may opt out of the market completely. Whether you trade during the Shanghai market session or not, this event impacts your trading outcome for various reasons, and this article explains them.
Here are four solid reasons why these holidays are crucial for global investing and how you can start investing smartly.
1. A Massive Void in the Global Trading Scene
Since China is the second-largest economy on Earth, the Shanghai stock exchange holidays leave a massive void in the global system. Many investors, especially in the Asian region, also take a break from participating in the markets.
With fewer people buying and selling, the prices of stocks in other countries can start to fluctuate. This makes it much harder for investors elsewhere to trade safely because there isn’t enough activity to keep prices moving.
2. The Gap Risk of Extended Breaks
In the United States or Europe, stock markets usually only close for one day at a time, like on Christmas Day. However, during certain Shanghai stock exchange holidays like the Lunar New Year or “Golden Week,” the market in China can close for up to seven consecutive days.
This creates a huge gap, which can be extremely risky for investors. Imagine if a major world event happens on a Monday, but the Chinese market doesn’t open until the following Friday. When it finally reopens, the price might jump to a totally different level instantly.
It creates a massive hole to fill, which can take weeks. Investors hate being “locked out” while the rest of the world is moving.
3. The Issue of Proxy Trading
A Shanghai market closure may cause some traders and investors to act less rationally.
For example, during a Shanghai market break, investors may still want to bet on whether the Chinese economy is doing well or poorly. Since they can’t trade directly in Shanghai, they go to other “proxy” markets, like Singapore or New York, to trade different versions of Chinese stocks.
This can be problematic as these copycat markets don’t always get the price right. Without the main office in Shanghai being open to set the “official” price, people in other countries can only guess. This can cause investors to lose money when the real market in Shanghai finally shows the true price.
4. The Shopping Trip Delay
China is the world’s biggest buyer of manufacturing raw materials such as copper, iron, and even oil. They use these materials to build skyscrapers, cars, and electronics, making them the world’s top exporters. When the Shanghai stock exchange holidays happen, the people who buy these materials automatically go on vacation. This affects countries like Australia and Brazil that sell these materials to China.
To illustrate, if the biggest customer is away for a week, the sellers become more reluctant to saturate the market. The same applies to the countries that supply to China. Therefore, the prices of these materials might stop moving or start falling.
For that reason, a holiday in Shanghai can change the price of gas or metal in a city thousands of miles away. It causes a giant chain reaction that starts the moment the Shanghai exchange locks its doors.
Tips for Investing Smartly During Chinese Holidays
If you want to be a smart investor, you must cultivate the habits of the most successful investors. One of their best secrets is keeping a calendar that shows more than just their local holidays. They follow global events to time how they execute their investment plans better.
If you want to invest smarter during the Chinese holidays, here is how to do it:
1. Watch the Calendar: Always check for the major Chinese holidays, such as the Lunar New Year and Golden Week. These are the two most crucial holidays that have the most effect on global trading and investing.
2. Be Careful with “Copycats”: You can trade a Chinese stock in New York even while Shanghai is closed. However, understand that doing this carries a higher risk than usual, and review your execution plans.
3. Expect the Unexpected: After coming from a major break, the market doesn’t just pick up from where it left off. So, prepare for unexpected events, such as plenty of noise and fast price movements when the Shanghai market reopens.
Conclusion
As long as you trade, the Shanghai stock exchange holidays affect you whether you live in China or not.
Although you might not habitually execute trades during the Shanghai session, it still influences your preferred market. During this break, you will experience unusual price movements in other sessions, such as sideways price movements and zero liquidity. So, understanding the reasons for its influence in the global markets prepares you for what’s to come on that trading day.
Investing involves picking a good broker as much as understanding the timing of the global clock. When a giant like Shanghai is inactive, the rest of the world must adjust its operations until it resumes normal duties. Knowing when periods happen is an edge in itself for anyone who wants to successfully partake in the world’s most liquid markets.
