Seasonal Trends in Forex Markets

You as a forex trader can either use fundamental analysis or technical analysis in studying the forex markets and making predictions about the future. The savvier among you will try to combine both in making predictions about the future direction a particular currency is going to follow.

Fundamental analysis depends on the study of underlying economic factors that affect currency markets. Technical analysis is based on the premise that past price action can be used to make predictions about the future price action in forex markets.

There is something known as, The January Effect. Many stock traders must be familiar with this term. This effect is based on a simple observation that during the last day of December and the fifth trading day in January stock prices tend to rally.

There is nothing extraordinary about the January Effect. The effect takes place due to the fact that many investors try to recognize capital gains or losses at the end of the year due to tax reasons. Many corporations also try to window dress their balance sheets at the end of the year.

The interesting fact is that seasonality is not peculiar to the stock markets. Forex markets also tend to show seasonal effects. Seasonality is defined as a pattern that occurs at a particular time of the year.

The January Effect also affects forex markets due to the fact that many investors who are adjusting their stock positions try to convert their local currencies into dollars at that time.

However, the January Effect is more pronounced in certain currency pairs as compared to others. For example, dollar shows pronounced January Effect against some currencies but not other. The Summer Effect also takes place when dollar shows a summer seasonality when it tends to rise in USD/JPY and USD/CAD in the beginning of July and give back its gains by August.

There are many other seasonal patterns in currency pairs. However, it does not mean that you should believe in these effects blindly. Just keep them in your mind when trading.

Seasonality only shows that there are strong chances that during a particular time of the year, the chances of a particular currency pair going up or down are more.

In some years, the effect may be pronounced. In others, not so pronounces. As a forex trader, you should keep these seasonal effects at the back of your minds while trading during that time of the years. You need to just understand these seasonal patterns.