How To Use Seasonal Trends In Forex Trading
There are many strategies and techniques that you can adopt for forex trading. One of these is using seasonal trends as a way to predict how the markets will move. This is because regular fluctuations or patterns occur, depending on what time of year it is. Analysts have demonstrated that it is possible to make reasonably reliable seasonal predictions.
Here’s how forex traders use these patterns to enhance their profits. Seasonal trading shouldn’t be adopted as a complete trading strategy; you will certainly need other factors in place to trade effectively. However, an awareness of seasonal patterns can help you to make better trading decisions, especially at certain times of the year.
What is seasonality?
When traders talk about seasonality, they are referring to predictable trends that repeat over a number of years. Of course, there are always curve balls that throw things off kilter, such as pandemics and wars. However, when a pattern is repeated on a one year cycle up to 80% or 90% of the time over a number of years, it’s regarded as sustainable and significant.
To understand seasonal patterns, analysts focus solely on price and time, and filter out the noise of indicators. Remember that any results are based on averages, and therefore they should only be used in combination with other technical analysis.
Why do seasonal patterns occur in forex?
There are some known factors that cause cyclical patterns in the forex and other financial markets, although it is not an exact science. Some theories do not appear to hold much weight, or are disputable, while other patterns seem to defy an easy explanation. Season can refer to calendar events, as well as the climatic conditions.
There are a few reliable and predictable seasonal events which will always have an impact. For example, holiday periods, especially those which are widely celebrated in the US, affect the forex markets. There will be an increased demand for consumer goods and food around Christmas, Thanksgiving and Halloween for example.
During the summer vacation period, there will be demand for other goods, such as air conditioning units and outdoor furniture. Petrol consumption tends to rise during the summer as people take more holidays and trips out. Foreign travel tends to be higher during summer months, which can affect the forex markets.
The climate also affects seasonal trends, and while this is in some ways predictable, there are of course always variables. For example, poorer than average summer weather may mean tourism and foreign travel is weaker than expected, and there is less demand than anticipated for certain consumer goods, while demand for others is unseasonably high.
The weather may also influence harvests and food production, if it has been a poor or unpredictable year. This in turn affects the trade balance of the countries who are major exporters of the affected produce, and the currency may correspondingly fall to lower than expected levels.
The wider forces that move the financial markets, known as macroeconomics, are particularly unstable at the moment. Some factors are also interrelated to seasonality, such as climate change. The world is starting to experience major and disruptive episodes of wildfire, flooding, storms, and drought, on a more frequent basis than in the past.
Therefore, it is important to keep up with geopolitical events and understand how these may drive the forex markets. Currently, the war in Ukraine is driving oil prices to record highs for example, which will inflate the currencies of major oil producing economies, and negatively impact those countries who rely heavily on imported oil.
There are certain economic announcements which are made at fixed times throughout the year, such as taxation rates, interest rate adjustments, and so on. It is helpful to obtain an economic calendar to help you keep track of the economic data releases which are relevant to forex trading.
Some data releases will only have a minor impact, or not be relevant to your currency pairs. There are certain predictable figures which impact the USD. Since this is by far the most commonly traded currency, it is important to track these key releases. Look out for unemployment figures, interest rate rises, inflation levels, and the GDP.
The market will also react strongly to sudden geopolitical events, such as outbreaks of war, pandemics, natural disasters, elections, and other signs of political instability. As we are living through relatively turbulent times at the moment, it is important to follow current affairs closely as part of your seasonal trading strategy.
So, while some seasonal events are cyclical and patterns can be identified over a one year period, there may well be macroeconomic or environmental factors which cause anomalies. It is best not to react too hastily to these however, because sometimes the expected market reactions do not occur, or the market may whipsaw.
What is a seasonal trading strategy?
When it comes to incorporating seasonality into your trading strategy, it is important to start with the wider time frame, i.e. years, then break it down into quarters, months, weeks, and so on, until you begin to look at times of day. This is known as a top-down strategy, and it applies whether you are a scalp trader, a day trader, or a swing trader.
There are some generalities that can be applied to the forex market as a whole. For example, September is usually a month of high volatility, which presents good profit-making opportunities for break out traders, for example.
Breakout traders identify a key price level that they expect the price to break through, and then buy or sell at that price to gain a maximum profit. The strategy works best when the market is moving strongly in one direction, hence the advantage of predicting periods of high volatility in advance.
To learn in more depth about breakout trading, it’s important to understand support and resistance levels, which can be plotted on a graph or chart. Support refers to the price level where a downturn in the market is expected to pause, because of favourable conditions and increased demand.
A resistance zone is where an uptrend in the market is predicted to pause for a temporary period. Traders watch support and resistance levels to judge which way the markets will turn, and seasonality is one of the factors that they take into account.
If the direction of travel is wrong, the position can be quickly closed to minimise losses. The timing, pace and volume of support and resistance are carefully monitored by breakout traders, to enable them to refine down to the last second when to make a trade, or reduce or increase a position size with more leverage.
How seasonality affects currency pairs
Anyone who has learned anything about trading will have noticed that the forex market is geared around the US dollar. It is a pair in about 85% of all currency transactions, so obviously this means that when it comes to using seasonal trends, it makes sense to look at what direction the USD is moving in, with other major currency pairs.
The EUR/USD tends to be in a weaker position at the start of the year in January, as foreign currency is invested overseas. The USD then tends to rally as new placements are made. The USD/EUR tends to reach a low, or ‘bottom’ around mid-February, and then climbs steadily again to a peak in April. August tends to be the worst month, before the September upturn.
The USD/GBP tends to follow behind the curve of the EUR/USD, bottoming out in March, before climbing throughout April. It then tends to peak in August.
The USD/CAD currency pair tends to rise during the early months of the year, before peaking by the end of February. It then peaks again in August, and declines in September. October and November are generally stronger months.
For the USD/JPY, the month of October tends to be the strongest trading time of the year. There doesn’t seem to be any official explanation of why this is the case, but it is certainly a statistically significant trend that has been identified over the years. During August, the JPY also tends to be in a strong position against the USD, the GBP, and the EUR.
In conclusion, currencies tend to move in predictable patterns year on year. Traders can identify these patterns with a top down approach to price and time analysis. to help them understand when to make the most profitable trades for different currency pairs.
Seasonality should not be used as a single trading strategy, but it can be used in combination with other techniques to help you make the most profitable trades.
If you want to learn in more depth about using cycles to improve your profits, you could also study time-based trading strategies. This will help you make a more detailed analysis of how months, days of the week, and the time of day affect the markets.
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