If you’re reading this article then you’ve no doubt heard about foreign exchange seasonal patterns. Maybe you’ve heard there are some strong ones that you can use to your advantage. Certainly, they often get reported by analysts and reporters. What they tell you, however, is very basic and of limited value.
Let me drill down a bit deeper for you.
The most common foreign exchange seasonal patterns you hear about are monthly ones. For example, someone will day EUR/USD tends to rise in December. What does that really mean, though? Does that mean EUR/USD starts rising on December 1st and continues through December 31st?
Consider what produces these seasonal patterns in the forex market. They’ll be things like trade and capital flows. Likely, those focus around important points on the calendar. For example, fiscal year-end for companies that need to move money around the globe. Do you think it takes 4 weeks for that to happen?
Also think about this. There are a lot of smart folks in the market who know the seasonal tendencies. Might it be possible that they position themselves ahead of time to take advantage of them? This sort of thing comes up a lot when talking about stuff like the research into year-end tax selling patterns in the stock market. Some patterns have actually gone away over time as a result of this front-running.
Between that sort of action by market participants and the fact that some patterns just don’t seem to fit neatly into a monthly structure, we have patterns that don’t line up. Some patterns overlap months, so they don’t show up really well in either one. No doubt his is why some folks don’t find value in seasonal patterns.
My own research, though, looks at some alternative time periods.
Let me use EUR/USD as an example. It’s pretty well known that the rate tends to drop in January – a bit over 60% of the time according to my research. February, though, has no particular pattern according to the standard analysis. My own work, though, shows that EUR/USD selling tends to carry through into the first half of February. This doesn’t show up in the normal seasonals, though, because the latter part of February tends to be positive for the rate.
This sort of thing happens all over the place in the market. In the vast majority of cases the monthly patterns are not statistically significant (see Forex seasonality: Beware this pitfall). These alternative patterns, however, are. That means you can have a higher degree of confidence using them in your trading.