Success Using Seasonal Patterns

Having been involved in the Financial Markets for over 30 years I have seen that markets behave in certain ways year in and year out. It underlines the fact that the driving forces behind financial markets are not necessarily based on Automated Trading but, more so, on good old fashioned Human Behavior.

Seasonal Cycles tend to be very strong in Equity and Commodity Markets but there are several that are regularly witnessed in FX. We tend to rely on technical analysis to identify trends, momentum, support and resistance etc. but, knowing when seasonal cycles are “in play” can be very important for traders throughout the year.

As we have regularly discussed it is vital to have a trading plan and plan your trades accordingly. Seasonal cycles should not be relied upon to enter trades but should be used to validate your trading strategy. So use technical and fundamental analysis to plan your trades and use any seasonal cycles to confirm or refute your strategy.

There are 3 well known seasonal cycles:

“Sell in May and Go Away”
This cycle has been popularized by the tendency of global equities, and the US Dollar, to decline in value in the summer months. Typically, the price of Oil rises in the summer months as we enjoy Summer Vacations. Due to its close affinity to Oil a “commodity currency” such as USDCAD historically declines in May and AUDUSD tends to rise (aka USD declines in value).

End of the “Summer Doldrums”
As Summer ends, vacations are done and kids go back to school, many traders also return to trading in earnest. The market sees larger market participants, such as Banks, Hedge Funds, Asset Managers etc. becoming more inclined to take risk as markets become more liquid.  The increased liquidity from all participants results in more volume and new volatility which, in turn, typically sees wider trading ranges in many currencies. If your trading strategy tends to be scalping, then wider ranges can provide more trading opportunities.

The “Christmas Rally”
As we approach the Christmas Holidays we typically see consumer spending increase and many larger institutions repatriating assets for the upcoming new year. As a result of this the value of the US Dollar typically rises along with the value of the equity markets.

The above clearly show that there are several seasonal cycles that occur each year. I would suggest taking time to further analyze historical data and look for additional seasonal cycles that could assist you with developing your trading strategy. As always safe trading!!

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