The old saying is to sell in May and go away. The rationale is that many traders do this and the market is often flat in the summer or low volume begets high volatility which can be dangerous. What are the other dangers of trading stocks in August? Investor Place writes about Microsoft but issues a warning about trading in August.

In a special note to my clients yesterday, I once more warned that August is a dangerous month for traders, as the usually choppy trading leads to many fake-out moves and thus losses for traders.

At the same time, August also has a tendency to see unexpected and often short-lived waves of volatility (such as we witnessed last week) that catch many traders flat-footed.
All in all, my best advice for August is for market participants to take a step back, become more selective and reduce position size. The September-November period often times is a much superior time for active market participants, and it’s only a few weeks away. Remain patient and don’t force trades that aren’t there.

Not forcing your trades is perhaps the best advice about the dangers of trading in August when there is often not enough volume to engage in accurate technical analysis.

Technical analysis says that the future direction of stock prices can be predicted solely by studying past market data for price and volume indicators. Technical analysis says that all relevant market data is reflected by prices so that fundamental analysis is unnecessary. Technical analysis data is built into trading programs allowing the day trader to predict pending market moves with a fair degree of accuracy.

But for this to work you need enough trading volume to make statistically based trading programs accurate. Because of low volume trading stocks in August and basing those trades on Technical Analysis can be dangerous.

How about Fundamentals in the Summer?

If you can’t trust technical Analysis, how about fundamental analysis? This is a good path to follow for long term investors and may be useful for swing traders who are following stocks that are otherwise ignored by Wall Street analysts. The famous Oracle of Omaha, Warren Buffett, started out by purchasing stocks that he described as one last puff of the cigar. They were companies that could be reorganized, restructured and made profitable however briefly before he sold them. Traders who pay attention to less-watched stocks can find bargains to buy and can short stocks that are ready to fall. This is not day trading but a longer version of swing trading. It can be profitable but requires a different mindset than technical analysis. And this sort of trading can be profitable in the summer when trading volume is low and volatility is high. But you need to pay attention and get out at the ever so brief peak when your unwatched stock suddenly becomes popular and before investors realize why it is not a long term bargain.